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BUSINESS FINANCE
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BUSINESS FINANCE
CHAPTER 5
Ways and Means to Minimize Investment Risks
This module was designed and written with you in mind. It is here to help you
measure and list ways to minimize or reduce risks in simple case problems. The
scope of this module permits it to be used in many different learning situations. The
language used recognizes the diverse vocabulary level of students. The lessons are
arranged to follow the standard sequence of the course. But the order in which you
read them can be changed to correspond with the textbook you are now using.
After going through this module, you are expected to evaluate and list ways to
minimize or reduce investment risks in simple case problems.

Risk is defined as a chance of loss. In finance, it is the chance that the actual return
would be different from the expected return on an investment. There are two
fundamental types of risks:
1. Systematic Risk – has effects that are wider in scope. It is almost impossible for
an investor to avoid this type of risk. Examples are: natural disaster- a massive
earthquake, a major political event- a coup de’ etat or a covid19 pandemic .
2. Unsystematic Risk – also referred to as specific risk, which affects only a small
number of assets. Examples would be a firm whose employees went on strike or a
major stockholder getting involved in a crime or scandal.
Investors resort to diversification which is a risk management technique wherein an
investor includes a wide variety of assets or investment products in his portfolio of
investments to minimize or protect themselves from unsystematic risk.
Ways and Means to Minimize Investment Risks
1. Determination of tolerance to different kinds of risk. Understanding the type of
risk, or the combination of types of risk, is essential in reducing those risks. Two
factors that can help determine the risk tolerance are:
a. Net worth – is assets minus liabilities.
b. Risk capital – is money that, if lost on an investment, won’t impact the
financial position and lifestyle. If there is high net worth and substantial risk
capital, the risk tolerance is higher. But if the net worth and risk capital is
modest or not much, it’s probable to be better off with conservative, low-risk
investments.
2. Conducting due diligence. This means making research about the investment
instruments, checking out the investment’s history, earnings’ growth, management
team and debt load. This information can be compared with other similar investment
products and to other assets in investment portfolio.
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BUSINESS FINANCE
3. Diversification of investment portfolio. Diversification is a risk management
strategy of combining a variety of assets to reduce overall risk in an investment
portfolio. One of its purpose is portfolio risk management. This lowers investments’
volatility as changes in market prices of different investments can happen at different
time intervals. This result in a more balance risk and return or risk is spread over a
variety of products.
4. Monitoring of investments. Regular reallocation of resources is necessary for
control purposes. Proper allocation of investments depends on such factors as age,
investment period and investment temperament. It is necessary to evaluate holdings
at least once a year to assess whether there is a need to buy or sell assets to bring
back the portfolio to proper asset allocation.
5. Taking advantage of government guaranteed investment products. It is very safe
to invest in an instrument which is guaranteed by the government like Treasury
bonds. These investments are fully backed by the Philippine government aside from
insurance from the Philippine Deposit Insurance Corporation (PDIC). In addition,
holding investment until its maturity is better considering market risks and penalties
except for a secured recovery of principal and interest.
What I Have Learned
1. Risk is the chance that the actual return would be different from the expected
return on an investment.
2. There are two fundamental types of risks: systematic risk and unsystematic risk.
3. The five ways and means to minimize investment risk are:
a. Determination of tolerance to different kinds of risk
b. Conducting due diligence
c. Diversification of investment portfolio
d. Monitoring of investments
e. Taking advantage of government guaranteed investment products
4. It is better for investors to diversify their investment portfolios in order to minimize
risk.
5. Equally important consideration when making investment decision is the risk
associated with an asset. Investors require higher returns on riskier assets.