Good day everyone, I’m and my topic is about the risk and return of a single asset, so before we start I

just want to ask if I’m loud and clear?

Okay thank you…..

first mention ko lang na yun risk and return directly related sila to each other, diba sabi nga the higher the
risk the higher the return but laging tandaan na magkaiba yun measurement nilang dalawa, magkaiba yun
measurement ng risk and magkaiba yun measurement ng return so later on ipapakita ko sa inyo yung
measurement nilang dalawa so that in the future kapag mag iinvest ka sa isang stocks or bonds, for
example same sila ng return so syempre ang una mong titignan is sino yun mas riskier and sino yun mas
less yun risky na investment, okayyyyy….
So ahm, dito muna tayo sa risk of a single asset: risk assessment….
Scenario Analysis ay isang method/approach na ginagamit ng isang business or organization para ma
predict yun mga possible risk na maaring ma encounter ng isang business, dito they go through looking a
wide range of possible outcomes and inaallow neto na ma identify. makapag prepared, at mamanage ng
mabuti ng isang business yun risk na possible na ma eencounter nila.

-One common method involves considering pessimistic (worst), most likely (expected) and
optimistic (best) outcomes and syempre kinoconsider den dito yun mga returns na associated
with them for a given asset.

Range Ito yun ginagamit para ma measure yun risk/asset risk, sa pamamagitan ng pag
subtract/pag minus ng return na associated sa pessimistic outcome and sa return na associated sa
ating optimistic outcome.

Next, illustration na tayo

Utang na loob Inc. is choosing between two investment, Investment A and Investment B. Both of these
investment requires a capital outlay of Php.150,000, and each has a most likely annual rate of return of
15%. Management also made pessimistic and optimistic estimates of returns associated with each. The
three estimates along with its range, is shown in the following slide.
So yun problem natin dito is yun investment A and investment B, and both has an equal amount and
return which is yun 150K and 15%, so ang tanong paano tayo mamimili? and yun determining factor pala
natin dito is yun risk….

INVESTMENT INVESTMENT
A B

Capital Outlay PHP. 150,000 PHP. 150,000

Annual Rate of Return

Pessimistic 13% 7%

Most likely 15% 15%

Optimistic 17% 23%

RANGE: 4% 16%

So eto yun ating assessment, yun most

likely annual return, same lang yan which 15%. Yun pessimistic yan yung negative annual rate of return.
So, sa investment A meron tayong 13% and yun pinaka optimistic niya, ng investment A is 17% which
give us a range of 4%, so class paano nakuha yun? So anyone from the class…. Okay magtatawag po ako,
ang ginawa dito is pinag minus lang, from pessimistic na 13% to optimistic na 17% which leave as a
range of 4%.
Sa investment B naman most likely natin is 15% den, yun optimistic rate of return naman niya is 7% and
yun optimistic naman is 23% so yun range niya 23% minus 7% is equals to 16%. Okay…
So siguro naisip mo alin nga ba dito sa dalawang investment ang mas riskier? syempre si investment B
why? Because mas Malaki yun kanyang range so it means mas Malaki yun chance na lumayo siya sa
most likely na rate of return na 15%,
Though may potential siya na mag increase (point sa 23%) pero may chance din na mapunta siya sa
negative side (point sa 7%), at hindi naman na pinoproblema na lumagpas siya ng 15% or maging 23%
siya the problem is paano kung mag fall siya into 7% lang siya okay, so in this scenario/ problem mas
risky yun investment B because of the range of 16%.
So next idadiagram natin yan para makita natin talaga yun level of risk, but before that dito muna tayo sa
risk of a single asset: risk assessment;
From the word probable- so yun probability ito yun mga chances or pwedeng mag occur na
outcomes sa isang business/investment.
A probability distribution isang siyang statistical function/ model na kung saan nirerelate niya yun mga
probabilities sa mga associated outcomes. Dinedescribes niya yun lahat ng mga possible values and
likelihoods that a random variable can take within sa given range. And yun mga range na ito will be
bounded between sa minimum at maximum na possible values.

bar chart ito yun pinaka simpleng type ng probability distribution; ang makikita lang dito is yun
limited number lang ng outcomes chaka yun mga associated probabilities sa isang given event.

A continuous probability distribution isa den siyang probability distribution pero dito
pinapakita lahat ng posibilidad na maging outcomes and yun mga associated probabilities den
ng isang given event

So eto na sa diagram na tayo, ito yun ating probability distribution……

So next: probability of distribution (continuous) ang pinagkaiba lang naman nitong continuous is yun pag
tabulate ng probability.
so, it’s the same paden po,
 INVESTMENT A

So given the 2 POSSIBLE RETURN PROBABILIT WEIGHTE investment which is the

OUTCOM S (k ) Y (Pr ) D
investment A and B with j j the same level of return,
E VALUE
the determining factor is (k xPr ) yun risk, kung ang
pipiliin natin ay mas less j j risky, go for investment
A. Pessimisti 13% 25% 3.25%
c
Okay next na tayo, let’s go in return measurement
for a single asset: the Most 15% 50% 7.50% expected return…..
Likely
Hindi sa lahat ng situation and most
especially in actual Optimisti 17% 25% 4.25% practice, hindi naman
c

Total: 100% 15%

Expected
Return
So ayan, paano ba natin (k )
kinocompute yun expected value of a return or our k bar.

So ganito lang siya guys, imumultiply mo lang naman dito is yun kJ na rate of return (diba
sabi nga natin maraming possible outcomes hindi lang basta tatlo) so we have n number of
outcomes, so yun kj imumultiply natin yan sa ating prj na probability of occurrence and yun
makukuha mo duon isa yun outcome, and on the second outcome gagawin mo ulet yun rate
of return times probability of occurrence then after that iaadd mo daw lahat yun (nakapoint
sa summation) syempre yun total nun is dapat 100% probability, okay so depending on how
many possible outcomes will occur, so kapag inaadd mo yun, yun na yung expected value of
return, or our k bar, and so as you notice yun yung tinatawag natin na probability weighted.

Then ayan yun n natin number of outcomes considered, so diba kanina tatlo yun ating
outcomes na considered, so kaya tatlong beses tayong mag sosolve , okay….

nangyayari na tatlo lang yun and ating tinetetake as to consideration ( yun most likely, optimistic and
pessimistic) measurement of return, syempre based on the previous experience we will see the
percentage that would lie into this rate of return (nakalagay yun arrow sa
pessimistic) base on previous experience hindi laging ganito na
pessimistic, most likely and optimistic, kasi pwede tayong magkaroon ng
exact probability measurement, based on the previous experience and that will give us the expected
return.

So next po, yan itatry na natin iaapply yun computation ng most likely expected return or our k bar duon
sa ating given example, okay….
So, in investment A we have returns of 13% pessimistic, 15% most likely and lastly we have optimistic na 17%.

However, yun probability of occurrence is not given, per syempre kung given yan ilalagay natin dito.

So sinabi natin na ito yun most likely, 50% siya, then yun ating pessimistic and optimistic tig 25% sila which will give
us a expected return of 100%.

So after that yun ating weighted value ( k times mo siya in our prj) in our pessimistic 3.25%, sa most likely 7.50%
and sa optimistic 4.25 %, then after that syempre isusum na natin yan which give us our k bar of 15%.

Kasi kung mapapansin niyo yun ating most likely na 15%.

INVESTMENT B

POSSIBLE RETURNS PROBABILITY WEIGHTED

OUTCOME (k ) (Pr ) VALUE (k xPr )
j j j j

Pessimistic 7% 25% 1.75%

Most 15% 50% 7.50%

Likely

Optimistic 23% 25% 5.75%

Total: 100% 15%

Expected
Return (k )

So, let’s compute for investment B, gagawin natin yun ginawa natin kay investment a, pessimistic, most likely and
optimistic (7%, 15% and 23%), so probability same process den ulet hindi naman binigay yun exact (so 25%, 50%,
25%), so after that multiply lang natin to obtain the weighted value (1.755, 7.50%, 5.75% then isusum natin yun
tatlong outcomes which gives us a total of 15% or yun ating k bar. (so as you can see yun atin expected return is
same lang) okayyyy….. so yun magiging decided factor natin dito is yun the level of risk, eto naman yun ating
imemeasure, pa next slide po.

Next, punta na tayo sa risk measurement (so tapos na tayo sa return) for a single asset: which is the Standard
deviation

(slide 4)

So Nakita natin na minesure natin yun risk which ang ginamit natin metrix ay the range (yun 4% and the 16%)
however class yun 4% may limitation eh because dito class if you can see ano lang yun ginamit natin value to
measure the risk (the lowest and the highest point yun 13% and 17%, 7% and yung 23%, though reliable naman
yun range as a measure of risk may limitation yan kasi hindi naman natin na considered yun most likely or yun
expected return yun ating K bar, so yun yung limitation nya kasi buti dito parehas silang 15%, ang tanong paano
kung magkaiba yan, so syempre hindi natin magagmit yung range, okay so proceed tayo.

Slide 11 to Slide 9

Instead ang gagamitin natin is the standard deviation (slide 11) , considering the most likely or the expected return
the k bar (slide 9):

So tuloy tayo pabalik po sa (slide 11)

The expression for the standard deviation of return σk, so yun expression nato standard deviation of k is eto
(ituro mo yun formula) ;
 So btw po tandaan natin na yun standard
deviation the higher the standard deviation,
the higher the risk, kasi pag mas disperse mas
mataas yung level of risk

So again we have the formula here standard deviation is equals to the square root of the sum (as you
can see meron tayong pinagleless at nagamit natin ito kanina -eto yun rate of return for one outcome
minus our k bar (or yun ating most likely) so dito po meron positive and negative kasi yun iba is below
siya sa ating k bar and yun iba is above the k bar, so to remove the effect yun ating positive and
negative iiisquare down natin yan ang multiplied byprobability of occurrence, so diba nagamit na
natin to kanina ( the probability of occurrence for that outcome) okay then yun makukuha natin dito
is iaadd natin for the n outcomes (so hindi kona ininclude sa ppt yun mga ibig sabihin nyan kasi
syempre nagamit na natin yang mga yan) okayyyyy

So let’ us continue the illustration for investment A and B yun problem natin kanina, so mag cocompute na tayo……

INVESTMENT A

j kj k kj - k ( kj - k )2 Prj ( kj - k )2 X Prj

1 13% 15% -2% 4% 25% 1%

2 15% 15% 0% 0% 50% 0%

3 17% 15% 2% 4% 25% 1%

TOTAL 2%

So for investment A, we have 3 outcomes (1, 2 and 3), so meron na tayong Kj yun return for this output, and then
we have already computes the k bar, and then imumultiply natin yun kj minus the k bar, tapos iisquare natin yan,
after that imumultiply natin yan sa probability of occurrence, so itong value na to yun squared multiply by the
probability of occurrence isusum natin and after that hindi tapos yan kasi iisquare root pa natin yan, that what we
called the standard deviation. So okay try na natin isolve, okay yun kj natin given yan 13, 15 and 17%, ating k bar
nacompute na natin yan diba (so ano na nga ba yun k bar natin, anyone from the class?) which is yun 15%, so next
yun probability of occurrence natin yun (25,50 and 25%) so take note po dito lang nagyari yan ah so it’s possible
na hindi yan equal, okay… let’s proceed kj - k bar (13-15, 15-15 chaka 17-15), and then next iisquare natin yan (4%,
0 and then 4%) then imumultiply natin (4 times 25%, 0 times 50% and 4 time 25%) tapos for the total of 2%.

-okay hindi pa ito yun standard deviation natin, why? Diba sabi ko yun standard deviation iisquare root pa natin
yan, so our standard deviation is 1.41% (so this the measurement of our dispersion for investment A)

INVESTMENT B
j kj k kj - k ( kj - k ) 2 Prj ( kj - k )2 X Prj

1 7% 15% -8% 64% 25% 16%

 2 15% 15% 0% 0% 50% 0%
3 23% 15% 8% 64% 25% 16%
TOTAL 32%

For investment B naman same process lang den (32%- yun total) then hindi pa yan diba yun standard
deviation kasi isquare root pa natin yan so ang makukuha nayin is 5.66% for investment B,

So standard deviation is what the measure of risk, so alin ang mas riskier dito?

Yun investment B, and since same lang sila ng rate of return preferable yun investment A.

Next naman is yun Normal distribution of Bell-shaped curve

Bell-Shaped Curve
Pag sinabing bell shaped curve ito yun ating Normal probability distribution na mayroong
ranges.

Normal probability Distribution

A symmetrical probability distribution whose shape resembles a “bell-shaped” curve
-Yun normal probability distribution that is depicted is always looks like a “bell-shaped” curve. So
Symmetrical siya, pag sinabing symmetrical it means From the peak ng graph hanggang duon sa curve’s
extensions ay reflections sila ng bawat isa. Pag symmetry it means yun half of the probability is
associated duon sa values ng left peak and other half naman is duon sa values ng right peak.

As you see in the figure, for normal probability distributions,

68 percent na possible outcomes will lie between +-1 standard deviation sa kaniyang expected value,
95 percent naman of all outcomes ay mag la lie between +-2 standard deviations mula sa kanyang
expected value,
and 99 percent of all outcomes will lie between +-3 standard deviations mula din sa kaniyang expected
value.
Next is the coefficient variation so dito po, lalabas na yung sinasabi ko kanina na what if magkaiba yun level of
return at level of risk, so how will we choose sa dalawang investment.

Standard deviation is useful in comparing risks of assets with same expected rate of returns. As earlier however if
the assets are with differing expected rate of returns mas appropriate daw gamitin yun CV or yung coeefcicient of
variation so that is the measure of our dispersion, so yun Standard deviation paden yan but relative siya to the
return.

the coefficient variation, the standard deviation or risk is relative to return (the k bar)
So sa example na tayo,

So ibang illustration nato, hindi na siya related sa illustration natin kanina.

INVESTMENT C INVESTMENT D

(1) Expected Return 12% 20%

(2) Standard 9% 10%

Deviation

(3) Coefficient of 0.75% 0.50%

Variation [(2) ÷ (1)]

So we have 2 investment here, Investment C and D, we have expected return na 12% for investment C and 20%
for investment D, and then we have standard deviation of 9% for investment C and 10% for investment D.

So the coefficient variation ( ito paden yun measure of risk) so as you can see pinag divide lang nila yun expected
return and standard deviation, so we have 0.75% for investment C and 0.50% for investment D, therefore yun
0.75% natin kay investment C yun mas risky because sabi natin nga diba kanina the larger the riskier… okay so
that’s my report and I hope you learn something from, so next reporter napo tayo, thank you.