Acc212 Sim

UNIVERSITY OF MINDANAO
Tagum College
Department of Accounting Education

Accountancy Program
Physically Distanced but Academically Engaged
Self-Instructional Manual (SIM) for Self-Directed Learning (SDL)
Course/Subject: ACC 212 – Financial Markets
Name of Teacher: Mary Cris L. Luzada, CPA, MSA
THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT FOR

REPRODUCTION AND DISTRIBUTION OUTSIDE OF ITS INTENDED USE.
THIS IS INTENDED ONLY FOR THE USE OF THE STUDENTS WHO ARE
OFFICIALLY ENROLLED IN THE COURSE/SUBJECT.
EXPECT REVISIONS OF THE MANUAL.
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116
Table of Contents
Page
Part 1. Course Outline and Policies................................................................. 1

Part 2. Instruction Delivery
CC‟s Voice............................................................................………….. 5
Course Outcomes................................................................................. 5
Big Picture A: Unit Learning Outcomes ............................................... 6
Big Picture in Focus:ULOa…………………………………………….. 6
Metalanguage....................................................................................... 6
Essential Knowledge............................................................................ 6
Self-Help............................................................................................... 10
Let‟s Check........................................................................................... 10
Let‟s Analyze......................................................................................... 11
In a Nutshell.......................................................................................... 12
Q&A List................................................................................................ 13
Keywords Index.................................................................................... 13
Big Picture in Focus:ULOb…………………………………………….. 14

Metalanguage....................................................................................... 14
Self-Help............................................................................................... 18
Let‟s Check........................................................................................... 19
Let‟s Analyze......................................................................................... 21
In a Nutshell.......................................................................................... 22
Q&A List................................................................................................ 22
Keywords Index.................................................................................... 23
Big Picture B: Unit Learning Outcomes ............................................... 23

Metalanguage....................................................................................... 23
ii
Davao del Norte
Telefax: (084) 655-9591, Local 116
Self-Help............................................................................................... 30
Let‟s Check........................................................................................... 30
Let‟s Analyze......................................................................................... 31
In a Nutshell.......................................................................................... 40
Q&A List................................................................................................ 41
Keywords Index.................................................................................... 41

Metalanguage....................................................................................... 42
Self-Help............................................................................................... 55
Let‟s Check........................................................................................... 56
Let‟s Analyze......................................................................................... 57
In a Nutshell.......................................................................................... 59
Q&A List................................................................................................ 59
Keywords Index.................................................................................... 59
Big Picture C: Unit Learning Outcomes ............................................... 60

Metalanguage....................................................................................... 61
Self-Help............................................................................................... 68
Let‟s Check........................................................................................... 69
Let‟s Analyze......................................................................................... 70
In a Nutshell.......................................................................................... 71
Q&A List................................................................................................ 72
Keywords Index.................................................................................... 72
iii
Davao del Norte
Telefax: (084) 655-9591, Local 116
Metalanguage....................................................................................... 73
Self-Help............................................................................................... 79
Let‟s Check........................................................................................... 79
Let‟s Analyze......................................................................................... 79
In a Nutshell.......................................................................................... 82
Q&A List................................................................................................ 82
Keywords Index.................................................................................... 82
Big Picture D: Unit Learning Outcomes ............................................... 83

Metalanguage....................................................................................... 83
Self-Help............................................................................................... 93
Let‟s Check........................................................................................... 94
Let‟s Analyze......................................................................................... 96
In a Nutshell.......................................................................................... 98
Q&A List................................................................................................ 99
Keywords Index.................................................................................... 99
Big Picture in Focus: ULOb…………………………………………….. 100

Metalanguage....................................................................................... 100
Self-Help............................................................................................... 109
Let‟s Check........................................................................................... 109
Let‟s Analyze......................................................................................... 110
In a Nutshell.......................................................................................... 113
Q&A List................................................................................................ 114
Keywords Index.................................................................................... 114
iv
Davao del Norte
Telefax: (084) 655-9591, Local 116
Part 3. Course Schedule................................................................................. 115

Online Code of Conduct...................................................................... 116
Monitoring of OBD and DED............................................................... 117
v
Davao del Norte
Telefax: (084) 655-9591, Local 116
Course Outline: ACC 212 – Financial Markets
Course Facilitator : Mary Cris Luzada, CPA, MSA

Email : luzadacris@umindanao.edu.ph
Student Consultation : Done online (LMS) or traditional contact
(calls, text,emails)
Mobile : 09228321794
Phone : None
Effectivity Date : August2020
Mode of Delivery : Online Blended Delivery (OBD)
Time Frame : 54 hours
Student Workload : Expected Self-Directed Learning
Pre-requisite : ACC 122
Credit : 3 units
Attendance Requirement : For online sessions: minimum of 95% attendance
For 1-day on campus/onsite review: 100%
attendance; for 1-day on-campus/on-site final
exam: 100% attendance
Course Outline Policies
Areas of Concern Details

Contact and Non-contact Hours This 3-unit course self-instructional manual is
designed for online blended mode of instructional
delivery with scheduled face to face or virtual
sessions which can be done usingLMS, traditional
contact (via cellphone/telephone and SMS) and
social media platforms (e.g. email, private
messenger, Facebook, Viber, WhatsApp, Line,
Zoom and other similar applications) depending
on what is available for both teachers and
students. The expected number of hours will be 54
including the face to face or virtual sessions. The
face to face sessions shall includethe summative
assessment tasks (exams) since this course is
included in the licensure exam for CPAs.
Assessment Task Submission Submission of assessment tasks shall be on the

3rd, 5th, 7th and 9th week of the term class.
Moreover, specific dates of submission are
specified in the Course Schedules Sectionof this
manual. The assessment paper shall be attached
with cover page including the title of assessment
task (if the task is performance), the name of the
course coordinator, date of submission and name
of the student. The document shall be submitted
to the course coordinator thru LMS (Quipper),
1
Davao del Norte
Telefax: (084) 655-9591, Local 116
email, FB messenger or thru any means

accessible tostudents. It is also expected that you
already paid your tuition and other fees before the
submission of the assessment task.
If the assessment task is done in real time through

the features of LMS accessible to students, the
schedule shall be arranged ahead of time by the
course coordinator.
Since this course is included in the licensure

examination for CPAs, you will be required to take
the Multiple Choice Question Exam inside the
school. This should be scheduled by your course
coordinator. This is non-negotiable for all
licensure-based programs.
Turnitin Submission To ensure honesty and authenticity, all

(if necessary) assessment tasks are required to be submitted
thru Turnitin with a maximum similarity index of
30% allowed. This means that if your paper goes
beyond 30%, the students will either opt to redo
her/his paper or explain in writing addressed to the
course coordinator the reasons for similarity. In
addition, if the paper has reached more than 30%
similarity index, the student may be called for a
disciplinary action in accordance with the
University‟s OPMon Intellectual and Academic
Honesty.
Please note that academic dishonesty such as

cheating and commissioning other students or
people to complete the task for you have severe
punishments (reprimand, warning, and expulsion).
Penalties for Late Assignments/ The score for an assessment item submitted after
Assessments the designated time on the due date, without an
approved extension of time, will be reduced by 5%
of the possible maximum score for that
assessment item for each day or part day that the
assessment item is late.
However, if the late submission of assessment

paper has valid reason, a letter of explanation
should be submitted and approved by the course
coordinator. If necessary, you will also be required
to present/attach evidences.
Return of Assignments / Assessment tasks will be returned to you one (1)
Assessments weekafter the submission. This will be returned by
2
Davao del Norte
Telefax: (084) 655-9591, Local 116
LMS, email, FB messenger or any other

communication platforms available for both
teacher and students.
For some group assessment tasks, the course
coordinator will require some or few of the
students for online or virtual sessions to ask
clarificatory questions to validate the originality of
the assessment task submitted and to ensure that
all the group members are involved.
Assignment Resubmission You should request in writing addressed to the

course coordinator his/her intention to resubmit an
assessment task. The resubmission is premised
on the student‟s failure to comply with the
similarity index and other standards or other
reasonable circumstances e.g. illness, accidents,
financial constraints.
Re-marking of Assessment You should request in writing addressed to the

Papers and Appeal program coordinator your intention to appeal or
contest the score given to an assessment task.
The letter should explicitly explain the
reasons/points to contest the grade. The program
coordinator shall communicate with the students
on the approval or disapproval of the request.
If disapproved by the course coordinator, you can

elevate your case to the program head or the
dean with the original letter of request. The final
decision will come from the Dean of College.
Grading System You shall be evaluated based on the following:
Assessment methods Weights

EXAMINATIONS 60%
A. Exam – 1st to 3rd 30%
B. Final Exam 30%
CLASS PARTICIPATIONS 40%
C. Quizzes 10%
D. Assignments 5%
E. Research/Requirement 15%
F. Oral recitation 10%
Total 100%
Submission of the final grades shall follow the

usual University system and procedures.
Preferred Referencing Style Use the general practice of APA 6th edition.
3
Davao del Norte
Telefax: (084) 655-9591, Local 116
Student Communication The course coordinator shall create Group Chat in

FB messenger for the class.Each student shall
create a Schoology account. The course
coordinator will then provide a Schoology access
code to the studentsfor them to enroll to have
access to the materials and resources of the
course. All communication formats: chat,
submission of assessment tasks, request, etc.
may be done thru any platforms available for the
convenience of teacher and students.
You can also meet the course coordinator in

person through the scheduled face to face
sessions to raise your issues and concerns.
Contact Details of the Dean Dr. Gina Fe G.Israel

Email: deansofficetagum@umindanao.edu.ph
Mobile: 09099942314
Larcyneil P. Pascual, MEAL
Email: larcyneil.pascual@umindanao.edu.ph
Mobile: 09187772524
Contact Details of the Program For Accountancy:

Heads
Mary Cris L. Luzada, CPA, MSA
Email: luzadacris@umindanao.edu.ph
Mobile: 09228321794
For Accounting Technology:
Maria Teresa A. Ozoa, CPA, MBA
Email: ozoamateresa@umindanao.edu.ph
Mobile: 09472657119
Students with Special Needs Students with special needs shall communicate
with the course coordinator about the nature of his
or her special needs. Depending on the nature of
the need, the course coordinator with the approval
of the program coordinator may provide alternative
assessment tasks or extension of deadline of
submission of assessment tasks. However, the
alternative assessment tasks should still be in the
service of achieving the desired course learning
outcomes.
Library Contact Details Clarissa R. Donayre, MSLS

Chief Librarian
Email: lictagum@umindanao.edu.ph
Mobile: 0927-395-1639
Well Being Welfare Support Rochen D. Yntig, RGC

Help Desk Contact Details Head
4
Davao del Norte
Telefax: (084) 655-9591, Local 116
Email: chenny.yntig@gmail.com
Number: 0932 7717 219
Mersun Faith A. Delco, RPm
Psychometrician
Email: mersunfaithdelco@gmail.com
Number: 0927 6086 037
Alfred Joshua M. Navarro

Facilitator
Email: is40fotb@gmail.com
Number: 0977 3416 064
Course Information –see/download course syllabusfromQuipper or

other available platforms
CC’s Voice: Hellothere! WelcometothiscourseACC 212:Financial Markets.

This course is related to financial management. As future
accountants, it is important for you to gain understanding on how
financial markets works and its relevance to business entities in
their quest towards effective management of their finances.This
course will help you evaluate worthiness of investment
opportunities taking into considerationthe associated risk and
reward. I am excited to share with you the basics on how to
invest in stock marketand for you to experience virtual stock
trading.Since this course will give you a glimpse of how
investment transactions are executed, it is my hope that you
would be able to integrate your knowledge in accounting for
investments in equity securities in ACC 122and be able to
identify accounting consequences of investment transactions. I
am confident that you will find this course relevant as this applies
not only to business but as well as to your personal finance. I
hope that you enjoy while learning this course!
Course Outcome (CO):As a student of this course you are expected discuss the
importance of an efficient financial system; be able to identify
types of financial markets; discuss how financial market works;
discuss how stock market operates and in what way that one can
earn from it; apply strategies in trading stocks virtually; apply
commonly used techniques in assessing investment under
uncertainty; be able to quantify risk and analyze risk-return
relationshipand apply Capital Asset Pricing Model (CAPM)
concepts in evaluating investments.
Let us begin!
5
Davao del Norte
Telefax: (084) 655-9591, Local 116
Big Picture A
Week 1–3: Unit Learning Outcomes (ULO): At the end of the unit, you are
expected to:
a. Discuss the importance of anefficient financial system; and
b. Differentiatethe types of financial markets.
Big Picture in Focus: ULOa.Discuss the importance of an efficient

financial system.
Metalanguage
For you to demonstrate ULOa, you will need operational understanding of the
terms enumerated below.
1. Financial System. This refers to a network that facilitates a more efficient
transfer of funds between savers and borrowers.
2. Financial Markets. This refers to the system that allows buy and sell of
financial instruments by the market participants
3. Financial Institutions / Financial Intermediaries. This refers to the banks or

non-bank institutions that act as mediators to facilitate financial transactions.
4. Financial Regulators. This refers to the government agencies that supervises

the financial activities and ensures to maintain safety and protection of the
investing public.
5. Asymmetric Information. This refers to information that market

participantsmay have about their opportunities or activities that they do not
disclose and can take advantage of it.
6. Direct Transfer. This refers to the condition wherein a corporation sells its
stock or debt directly to investors without going through a financial institution.
7. Indirect Transfer. This refers to the transfer of funds between suppliers and
users of funds through a financial institution.
8. Price Risk. This refers to the risk that an asset‟s sale price will be lower than
its purchase price.
6
Davao del Norte
Telefax: (084) 655-9591, Local 116
Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the first 3 weeks of
the course, you need to fully understand the following essential knowledge lay
down in the succeeding pages. Please note that you are not limited to exclusively
refer to these resources. Thus, you are expected to utilize other books, research
articles and other resources that are available in the university‟s library e.g. ebrary,
search.proquest.com etc., and even online tutorial websites.
1. Financial System. In finance, the term financial system is used to describe a
system that allows money to flow between savers and borrowers. It plays the key
role in the economy as this system provides channels to transfer funds from
individual and groups who have saved money to individuals and group who want
to borrow moneyin a safe and efficient manner.
2.Functions of Financial System. The functions of financial system include the
following:
 Works as an effective channel for optimum allocation of financial resources
in an economy.
 Helps in establishing a link between the savers and the investors.
 Allows „asset-liability transformation‟. Banks create claims (liabilities) against
themselves when they accept deposits from customers but also create
assets when they provide loans to clients.
 Facilitate transfers of economic resources (i.e., funds) from one party to
another.
 Ensures the efficient functioning of the payment mechanism in an economy.
 Helps in risk transformation by diversification, as in case of mutual funds.
 Enhances liquidity of financial claims.
 Helps price discovery of financial assets resulting from the interaction of
buyers and sellers. For example, the prices of securities are determined by
demand and supply forces in the capital market.
 Helps reducing the cost of transactions.
3. Services Provided by the Financial System.
3.1 Risk Sharing: Financial system provides risk sharing by allowing savers to
hold many assets which means it enables individuals to transfer risk. The
ability of the financial system to provide risk sharing makes savers more
willing to buy borrowers‟ IOUs. This willingness, in turn, increases
borrowers‟ ability to raise funds in the financial system.
3.2 Liquidity: The financial system provides savers and borrowers liquidity.
This means that an asset can be easily converted to money to purchase
other assets or exchanges for goods and services. Generally, savers would
want to hold highly liquid assets to be more flexible that allows them to
respond quickly to new opportunities or unexpected events.
3.3 Information: The financial system has two informational roles, namely:
collection and communication of information. The first informational role
the financial system play is to gather information about the prospective
7
Davao del Norte
Telefax: (084) 655-9591, Local 116
borrowers and what they will do with the funds. This is important because of
the presence ofasymmetric information which refers to information that
borrowers may haveabout their opportunities or activities that they do not
disclose to lenders or creditors and can take advantage of it.The second
informational role that financial system plays is communication of
information. Financial system thru the financial market can incorporate
information into the prices of stocks, bonds, and other financial assets. For
as long as market participants are informed, the information would be
reflected into asset returns and prices.
4.The three main components of financial system and their roles are:
4.1 Financial markets. This component is a system that enables participants to

buy and sell financial instruments and facilitates the flow of funds to finance
investments of corporations, government, and individuals.
4.2 Financial institutions. This component represents the key players in the
financial markets as they perform intermediary functions; therefore,
determine the flow of funds. This includes banks and non-bank institutions
like insurance companies, investment houses, financing companies,
securities dealers and brokers, pawnshops, non-stock savings and loan
associations, cooperatives, and the like.
Importance of Financial Institutions
Without financial institutions, there would be a direct transfer of funds from

suppliers of funds to users of funds. In the same manner, financial claims
would flow directly from users of funds to suppliers of funds. In this situation,
suppliers of fund will not be attracted to invest which will result to a low level
of flow of funds and lesser financial market activities. This is likely to happen
because without financial institutions, there will be:
1. high monitoring costs
2. liquidity concerns
3. price risk
With the presence of financial institutions in the financial system, there is

indirect transfer of funds from the suppliers to the ultimate users of funds.
The following are the services performed by the financial institutions:
Services benefiting suppliers of funds:
1. Lower monitoring costs

2. Higher liquidity and lower price risk
3. Reduced transaction costs
4. Maturity intermediation – financial institutions can better handle
mismatching of maturities of their assets and liabilities
5. Denomination intermediation – financial institutions allow small investors
to overcome constraints to buying assets imposed by large minimum
denomination size
8
Davao del Norte
Telefax: (084) 655-9591, Local 116
Services benefiting the overall economy:
1. Money supply transmission

2. Credit allocation
3. Intergenerational wealth transfers – financial institutions provide savers
with the ability to transfer wealth from one generation to the next.
Example: life insurance companies and pension funds.
4. Payment services
4.3 Financial regulators. This component is responsible for monitoring and

regulating the participants in the financial system for the purpose of
ensuring safety and security. Among the regulatory bodies in the Philippines
are as follows:
 Securities and Exchange Commission (SEC)is a national regulatory
agency that oversees corporations, capital market participants, and the
securities and investment instrument market, to protectthe investing public.
 BangkoSentralngPilipinas (BSP)supervises operations of banks and
exercises regulatory powers over non-bank financial institutions with quasi-
banking functions.
 Insurance Commission (IC)regulates and supervises the insurance, pre-
need, and Health Maintenance Organization (HMO) industries in the
Philippines.
 Philippine Stock Exchange (PSE) is the only stock exchange in the
Philippines.
5.How Financial System Works. The activities in a financial system are depicted
in the diagram below:
Financial Regulators
Financial Institutions
[
Savings (Indirect) Lending
Savers
(those who have excess Borrowers
cash to invest: (those who need cash:
SURPLUS units) Lending DEFICIT units)
Savings
Lending
Financial Markets
[
(Direct)
Figure 1. How Financial System Works
9
Davao del Norte
Telefax: (084) 655-9591, Local 116
Figure 1 shows that in a society there will always be individuals, firms, government
or any other institutions that either looking for good investments to place their
excess money (the savers or surplus units) or looking for funds to finance their
cash needs (the borrowers or deficit units). Primarily, the financial system
facilitates the matching of the supply and demand for funds through the financial
institutions and the financial markets. The savers have two options: save their
money through financial institutions or invest it directly to financial markets. Either
way, the objective of the saver is to increase the value of his money with the
earnings that he can get from his investment. Earnings from such investment vary
relative to the risk associated with the investment.Meanwhile, the collected deposits
by the financial institutions will then be made available by extending loans to those
qualified borrowers who will opt to get their financing needs from a financial
institution or financial institutions may also make the funds available to the
borrowers through the financial markets. Some borrowers may opt to get their
financing needs from the financial markets through issuance of financial
instruments like shares, bonds, money market, etc.
Self-Help: You can also refer to the sources below to help you
further understand the lesson.
Alimar-Mutya, R. F. (2017). Introduction to money, credit and banking.

Mandaluyong City: Anvil Publishing, Inc.
Darškuvienė, V. (2010). Financial markets. Retrieved from

https://www.bcci.bg/projects/latvia/pdf/7_Financial_markets.pdf.
Francis, A. (2010). Financial system – meaning, functions and services. Retrieved

from MBA Knowledge Base website: https://www.mbaknol.com/business-
finance/financial-system-and-its-functions
Laman, R. B., Laman, V. B., &Evia, Emiliana P. (2015). Financial system, market &
management: the basics. Manila: GIC Enterprises & Co., Inc.
Let’s Check
Activity 1:
TRUE or FALSE. Write TRUE if the statement is correct and FALSE if it incorrect.
__________ 1.Financial markets, financial institutions and financial regulators must

be present for a financial system to work efficiently and effectively.
__________ 2. Financial system increases the liquidity of financial assets.
__________ 3. In a financial system, all information is always available to the
investing public.
__________ 4.Financial system allows risk sharing by making it possible for an
investor to hold various types of assets.
10
Davao del Norte
Telefax: (084) 655-9591, Local 116
__________ 5.Financial institutions include only all types of banks.

__________6. It would be more beneficial if there are no financial institutions
because without them, financial costs will be lower.
__________ 7. Financial regulators ensure the safety and security of all the
participants in the financial system.
__________8. Direct transfer of funds from suppliers to borrowers is better
compared to indirect fund transfers.
__________ 9. Financial system provides risk sharing, liquidity and information.
__________ 10. Financial system collects information and communicates them to
the participants.
Activity 2:
ENUMERATION. Enumerate the following:
1. What are the three components of the financial system?

1.1 ___________________________________________________________
1.2 ___________________________________________________________
1.3 ___________________________________________________________
2. Give at leastfive (5) functions of the financial system?
2.1 ___________________________________________________________
2.2 ___________________________________________________________
2.3 ___________________________________________________________
2.4 ___________________________________________________________
2.5 ___________________________________________________________
3. What are the three components of the financial system?
3.1 ___________________________________________________________
3.2 ___________________________________________________________
3.3 ___________________________________________________________
Let’s Analyze
Activity 1. In this activity, you are required to elaborate your answer to the given
questions below.
1. Explain how financial system works.
_____________________________________________________________
_____________________________________________________________
11
Davao del Norte
Telefax: (084) 655-9591, Local 116
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
2. Discuss the importance of an efficient financial system in relation to a

country‟s economy.
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
In a Nutshell
Grasping the basic concepts of how financial system works is important towards
better investment decision making in the future. Based on the concepts presented,
write the three remarkable lessons you learned.
1. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
2. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
12
Davao del Norte
Telefax: (084) 655-9591, Local 116
3. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
Q&A List
Do you have any question for clarification? Write them here.
Questions/Issues Answers
1.
2.
3.
4.
5.
Keyword Index
Asymmetric information
Financial system
Financial markets
Financial institutions
Financial regulators
Big Picture in Focus: ULOb.Differentiate the types of financial

markets.
13
Davao del Norte
Telefax: (084) 655-9591, Local 116
Metalanguage
For you to demonstrate ULOb, you will need operational understanding of the
1. Primary Marketsaremarkets in which users of funds raise funds through
issuance of new financial instruments whether stocks or bonds.
2. Secondary markets are markets in which financial instruments will be traded

(rebought and resold) after they have been issued in the primary markets
3. Money markets are markets that trade debt securities or instruments with
maturities of one year or less.
4. Capital Markets are markets that trade equity (stocks) and debt (bonds)
instruments with maturities of more than one year.
5. Foreign Exchange Markets are markets in which cash flows from the sale of
products or assets dominated in a foreign currency are transacted.
6. Derivative markets are the newest type of financial markets in which

derivative securities trade.
Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the first 3 weeks of
the course, you need to fully understand the following essential knowledge laid
down in the succeeding pages. Please note that you are not limited to exclusively
refer to these resources. Thus, you are expected to utilize other books, research
articles and other resources that are available in the university‟s library e.g. ebrary,
search.proquest.com etc., and even online tutorial websites.
1. Financial Markets and their economic functions. Financial market is where
the buying and selling of financial instruments takes place. Different institutions can
raise funds in the capital market, transfer risk in the derivative market and do
international trade in the currency market. The three major economic functions of
financial markets are:
1.1 Price Discovery function. This means that the transactions between the
buyers and sellers in the financial markets determine the price of a
particular financial instrument.
1.2 Liquidity function. This function of the financial markets gives an

opportunity for investors to sell a financial instrument anytime because of
the presence of potential investors.
14
Davao del Norte
Telefax: (084) 655-9591, Local 116
1.3 Reduction of Transaction Costs. Financial market participants will be

charged for trading financial instruments. The reduction of transaction costs
function is manifested when institutions would strive to keep their
transaction costs as low as possible to attract more investors and survive.
2. Market participants.The participants in financial markets can be classified into

various groups based on their motive for trading:
Public investors. These include private individuals and institutional investors who
will ultimately own the securities and are motivated by the returns from
holding the securities.
Brokers. Those who act as agents for public investors and are motivated by the
remuneration (commission fees)received for the services they provide.
Hence, they trade for others and not on their own account.
Dealers.Those who do trade on their own account but whose primary motive is to
profit from trading rather than from holding securities. They obtain their
return from the differences between the prices at which they buy and sell
the security over short intervals of time.
Credit rating agencies (CRAs). Those who assesses the credit risk of borrowers
3. Types of Financial Markets. Financial markets can be classified into:
1. Money markets
2. Capital markets
3. Foreign exchange markets
4. Derivative markets
3.1 Primary markets versus Secondary markets
Primary markets are markets in which users of funds raise funds through
issuance of new financial instruments whether stocks or bonds. Primary
market financial instruments include issuance of shares by firms who will be
trading their shares publicly for the first time. These first-time issues are
usually referred as initial public offering (IPO).
Figure 2. Primary markets

(where new issues of financial instruments are offered for sale)
Users of Funds Initial Suppliers of Funds

(Corporations issuing Underwriting with (Investors)
debt/equity instruments) Investment Bank
Financial instruments flow

Funds flow
Secondary markets are markets in which financial instruments will be

traded (rebought and resold) after they have been issued in the primary
markets. Buyers in the secondary market securities are economic agents
15
Davao del Norte
Telefax: (084) 655-9591, Local 116
(consumers, businesses, and government) with excess funds while sellers

are those who need funds. Hence, secondary markets provide a centralized
marketplace where economic agents know they can transact quickly and
efficiently.
Figure 3. Secondary markets

(where financial instruments, once issued, are traded)
Economic Agents Economic Agents

(Investors) wanting to sell Financial Markets (Investors) wanting to
securities buy securities
Financial instruments flow

Funds flow
3.2Money Markets versus Capital Markets
Money markets are markets that trade debt securities or instruments with
maturities of one year or less. Hence, applicable for sellers who have short-
term financial need and buyers with excess funds for a shorter period.
Because of the short-term nature of financial instruments traded in the money
markets, the fluctuations in their prices are usually quite small. Usually money
markets do not operate in a specific location instead, transactions occur via
telephones, wire transfers and computer trading. Thus, they are said to be
over-the-counter (OTC) markets.
The following are money market instruments:
 Treasury bills – short-term obligations issued by the government.

Issuance of treasury bills is one of the common ways by which the
government raise funds from the public. They are issued in a competitive
bidding process at an auction sale. In a competitive bidding, the bidder
needs to specify the return that he would like to receive. The bidder who is
willing to receive the lowest return will receive the security. Treasury bills
are issued in denominations and they are considered the safest and risk
free among all investments since it is issued by the government. Lastly,
income received from investing in treasury bills are free of tax from both
national and local governments.
 Negotiable Certificate of Deposit (CD) - bank issued time deposits that
specify an interest rate and maturity date and are negotiable.
 Bankers Acceptances– are time drafts payable to a seller of goods, with
payment guaranteed by a bank.
 Commercial Papers – are short-term unsecured promissory notes issued
by a company to raise short-term cash.
 Municipal and Government Notes
16
Davao del Norte
Telefax: (084) 655-9591, Local 116
 Mutual Fund – a form of a collective investment that pools money from

several investors and invest it in stock, bonds, money market instruments
and other securities. A fund manager trades the fund securities earning
capital gains and collecting dividends or interest income from their
investments. A fund manager is also known as a portfolio manager.
Types of mutual funds:
a. Open-end mutual fundmeans that the fund stands ready to issue new
share to the investors and is ready to buy back the shares from those
who choose to leave the fund.
b. Close-end mutual fund issues a limited number of share/units in an
initial public offering (IPO). The distinction between close-end mutual
fund from open-end mutual fund is that it is close to capital after it
starts operation, its shares are typically traded in stock exchange and
not redeemed directly by the fund and its shares can be traded during
the trading hours anytime while in an open-end mutual fund, shares
are usually traded only at the closing price at the end of the market
day.
c. Equity funds – the most common mutual funds, consist mainly of
stock investments
d. Growth funds – the more conservative investments which focus on
stocks that pay dividends
e. Value funds –invest on stocks that are undervalued which will yield
higher returns to compensate the greater risk involved
 Repurchase Agreements – are agreements involving the sale of

securities by one party to another with a promise by the seller to
repurchase the same securities from the buyer at a specified date and
price,
Capital Markets are markets that trade equity (stocks) and debt (bonds)
instruments with maturities of more than one year. Given the longer maturity,
these instruments experience wider fluctuations when traded in the secondary
markets compared to money market instruments. Capital markets are
subdivided into:
 Stock Market – provides capital through the issuance of shares and
allows the subsequent trading thereof in the secondary market.
 Bond Market – facilitates financing through the issuance of bonds and

enables the subsequent trading thereof.
The following are capital market instruments:
 Corporate stock – the fundamentals ownership claim in public

corporation
17
Davao del Norte
Telefax: (084) 655-9591, Local 116
 Mortgages – loans to individuals or business to purchase a home, land

or other property
 Corporate bonds – long-term bonds issued by corporations
 Treasury bonds–long-termbonds issued by the government
 Bank and consumer loans – loans to commercial banks and individuals
3.3 Foreign Exchange Marketsare markets in which cash flows from the sale of
products or assets dominated in a foreign currency are transacted. It is a global
online network where traders buy and sell currencies. It is the largest and most
liquid financial market in the world. Demand and supply determine the differences in
exchange rates, which in turn, determine traders‟ profits. The global market has two
tiers: the interbank market and theover the counter.
Interbank market is where the biggest banks exchange currencies with each
other. Even though it only has few members, the trades involve enormous
amounts. Hence, it can dictatethe values of the currency.
Over-the-counter market is where companies and individuals trade,

otherwise known as the retail market. It has gained popularitywith the presence
of companies offering online trading platforms. With a small amount of money,
one can already trade foreign currencies. However, it should be kept in mind
that this type of market is very volatile, thus, very risky.
Foreign exchange trading is a contract between two parties. There are three
types of trades. The spot market is for the currency price at the time of the
trade. The forward market is an agreement to exchange currencies at an
agreed-upon price on a future date.
3.4 Derivative markets are the newest type of financial markets in which derivative
securities trade.A derivative securityis a financial security whose payoff is linked to
another previously issued security such as a security traded in capital or foreign
exchange markets. It generally involves an agreement between two parties to
exchange a standard quantity of an asset or cash flow at a predetermined price and
at a specified date in the future. The value of the derivative security changes,as the
value of the underlying security to be exchanged changes.
Alimar-Mutya, R. F. (2017). Introduction to money, credit and banking.

Mandaluyong City: Anvil Publishing, Inc.
Amadeo, K. (2019). Foreign exchange market:the market that dwarfs the stock
market. Retrieved from https://www.thebalance.com/foreign-exchange-
market-3306088.
18
Davao del Norte
Telefax: (084) 655-9591, Local 116
Darškuvienė, V. (2010). Financial markets. Retrieved from

https://www.bcci.bg/projects/latvia/pdf/7_Financial_markets.pdf.
Saunders, A., & Cornett, M. M. (2019). Financial markets and institutions (7th ed.).
New York: McGraw Hill Education.
Let’s Check
Activity 1: IDENTIFICATION. Write the type of market being referred in the

statements below.
___________________________ 1. This is a type of market in which users of

funds raise funds through issuance of new
financial instruments whether stocks or bonds.
___________________________ 2. This is a type of market that trade debt
securities or instruments with maturities of one
year or less.
___________________________ 3. This market facilitates financing through the
issuance of bonds and enables the
subsequent trading thereof.
___________________________ 4. This is a type of market in which cash flows
from the sale of products or assets dominated
in a foreign currency are transacted.
___________________________ 5. This type of market is where companies and
individuals trade, otherwise known as the
retail market.
___________________________ 6. This is a financial security whose payoff is
linked to another previously issued security
such as a security traded in capital or foreign
exchange markets.
___________________________ 7. This market provides capital through the
issuance of shares and allows the
subsequent trading thereof in the secondary
market.
___________________________ 8. This is a type of market in which financial
instruments will be traded.
___________________________ 9. This is a type of market that trade equity
(stocks) and debt (bonds) instruments with
maturities of more than one year.
___________________________10. This market is where the biggest banks
exchange currencies with each other
Activity 2: ENUMERATION:Enumerate the following:
19
Davao del Norte
Telefax: (084) 655-9591, Local 116
1. What are the four major classification of financial markets?
1.1 ________________________________________________________
1.2 ________________________________________________________
1.3 ________________________________________________________
1.4 ________________________________________________________
2. What are the economic functions of financial markets?
2.1 _________________________________________________________
2.2 _________________________________________________________
2.3 _________________________________________________________
3. Enumerate five examples of capital market instruments
3.1 __________________________________________________________
3.2 __________________________________________________________
3.3 __________________________________________________________
3.4 __________________________________________________________
3.5 __________________________________________________________
4. Enumerate five examples of money market instruments
4.1 __________________________________________________________
4.2 __________________________________________________________
4.3 __________________________________________________________
4.4 __________________________________________________________
4.5 __________________________________________________________
Let’s Analyze
20
Davao del Norte
Telefax: (084) 655-9591, Local 116
Activity 1. In this activity, you are required to elaborate your answer to the given
questions below.
1. Discuss the importance of financial markets in the economy.
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
2. Distinguish primary markets from secondary markets.
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
3. Distinguish money markets from capital markets.
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
In a Nutshell
Summarize your understanding in this section by distinguishing each type of
financial markets. Write the prominent features of each financial market in the table
provided below:
Money Market Capital Market
21
Davao del Norte
Telefax: (084) 655-9591, Local 116
Foreign Exchange Market Derivative Market
Q&A List
1.
2.
3.
4.
5.
Keyword Index
Financial markets Derivative markets

Money markets Foreign exchange markets
Capital markets Primary markets
Secondary markets
Big Picture B
22
Davao del Norte
Telefax: (084) 655-9591, Local 116
Week 4–5: Unit Learning Outcomes (ULO): At the end of the unit, you are
expected to:
a. Discuss how stock market operates and how market participants earn from
it.
b. Apply strategies in performing virtual stock trading.
Big Picture in Focus: ULOa.Discuss how stock market operates and

how market participants earn from it.
Metalanguage
For you to demonstrate ULOa, you will need operational understanding of the terms
enumerated below.
1. Stock Market is where public corporations efficiently and cheaply get their
needed funds by selling to the supplier of funds (investors) their equity
securities.
2. Firm commitment underwritingrefers to underwriting agreement wherein the

investment bank guarantees the corporation price for newly issued securities by
buying the whole issue at a fixed price from the corporate issuer.
3. Best efforts underwriting refers to the underwriting agreement wherein the

underwriter does not guarantee a price to the issuer and acts more as a placing
or distribution agent for a fee.
4. Philippine Stock Exchange - the only stock exchange in the Philippines.
5. Stockbrokersact as an agent between a buyer and seller of stocks in the

market.
6. Listed Companies are companies whose shares of stock are traded.
7. Clearing Houseis responsible for ensuring that executed trades are

appropriately settled.
8. Depositoryacts as securities depository or “custodian” of listed shares of stock

that are traded at the stock exchange.
9. Transfer Agentsare considered the “official keeper” of the corporate

shareholder records.
Essential Knowledge
23
Davao del Norte
Telefax: (084) 655-9591, Local 116
To perform the aforesaid big picture (unit learning outcomes) for the 4thand 5th
weeks of the course, you need to fully understand the following essential
knowledge laid down in the succeeding pages. Please note that you are not limited
to exclusively refer to these resources. Thus, you are expected to utilize other
books, research articles and other resources that are available in the university‟s
library e.g. ebrary, search.proquest.com etc., and even online tutorial websites.
1. The Stock Markets. Stock market is where public corporations efficiently and
cheaply get their needed funds by selling to the supplier of funds (investors) their
equity securities. In exchange, the fund users (firms) give the fund suppliers
ownership rights in the firm as well as cash flows in the form of dividends.
2. Primary stock marketsare markets in which users of funds raise funds through
new issues of stocks. The new share securities are sold to initial investors in
exchange for funds that the issuer needs. Most of the primary market transactions
go through investment banks. Investment banks can either conduct a primary
market sale using a firm commitment underwriting or best efforts underwriting
basis. In a firm commitment underwriting, the investment bank purchases the stock
from the issuer for a guaranteed price (net proceeds) and resells it to investors at a
higher price (gross proceeds). The difference between the gross proceeds and the
net proceeds is referred to as the underwriter’s spread which is the compensation
for the expenses and risks incurred by the investment bank with the issue. Usually
the investment bank will tap other investment banks to help sell and distribute the
new issues referred as a syndicate.
Usually primary markets are applicable to initial public offering (IPO) shares wherein
share are publicly traded in the stock markets for the first time. However, primary
markets are also applicable to seasoned offering wherein the firm whose shares
are already traded in the secondary markets wishes to sell additional new issue
shares. In this case, existing shareholders can exercise their preemptive rights.
Preemptive right is the right of the existing shareholders in which new shares must
be offered to existing shareholders first in such a way that they can maintain their
proportional ownership in the corporation.
Figure 4. Primary market stock transaction

Stocks Stocks
Issuing
Corporations Investment Bank Investors
Funds Funds
3. Secondary stock markets are markets in which the stocks will be traded
(bought and sold by investors) after they have been issued in the primary markets.
When a transaction occurs in a secondary market, funds are exchanged, usually
with the help of a securities broker or firm acting an intermediary between the buyer
and the seller of the stock. The original issuer of the stock is not involved in this
transfer of stocks or funds. Examples of stock exchange are the New York Stock
24
Davao del Norte
Telefax: (084) 655-9591, Local 116
Exchange (NYSE), the National Association of Securities Dealers Automated

Quotation (NASDAQ) and our very own the Philippine Stock Exchange (PSE).
Figure 5. Secondary market stock transaction

Stocks Stocks
Seller Stock Exchange Buyer
Funds Funds
4. Stock Market as an Investment Opportunity. Investing in stock market is

among the options one can consider as an investment opportunity. With proper
knowledge and risk management, one can grow its money through stocks. An
investor can make his money grow in the stock market in two ways:
 By receiving dividends – This happens when the company where the

investor invested his money declares dividends to its shareholders.
 By capital appreciation or increase in stock price. – This happens when the

investor sells the shares, he is holding at a price higher than his purchase
price, therefore realizing a profit.
5. The stock market participants.A stock market is usually composed of the

following market participants:
5.1 Investors also referred to as stockholders or shareholders, are those

who own shares of stock of a publicly listed company. As owners, they are
given certain privileges like the right to fair and equal treatment, the right to
vote and exercise related rights, and the right to receive dividends and other
benefits applicable to stockholders. They are classified as either retail or
institutional, and local or foreign.
5.2 Stockbrokers. A stockbroker or trading participant is licensed by the

Securities and Exchange Commission (SEC) and is entitled to trade at the
Exchange. They act as an agent between a buyer and seller of stocks in the
market. For their services as stockbrokers, they receive from their clients
either a buying or a selling commission.There are two (2) types of
stockbrokers:
• Traditional – those who assign a licensed salesman to handle the

investor‟s account and take orders via a written instruction or a phone call.
• Online – those whose main interface is the internet where clients execute
their orders and access market information online.
5.3 Listed Companies, also called “issuers”, are those whose shares of
25
Davao del Norte
Telefax: (084) 655-9591, Local 116
stock are traded on the Exchange. These companies have gone through
initial public offering (IPO) or listing by way of introduction after qualifying
with the stringent listing and reportorial requirements of the PSE. Listed
companies are classified into six different sectors:Financials, Industrial,
Holding Firms, Property, Services, and Mining and Oil.
5.4 Clearing Houseis responsible for ensuring that executed trades are
appropriately settled. In the Philippines, this role is played by the Securities
Clearing Corporation of the Philippines (SCCP).
The SCCP is a wholly owned subsidiary of the Exchange. It was established

to ensure the orderly settlement of equity trades executed at the PSE. The
SCCP uses the Central Clearing and Central Settlement (CCCS) system
purchased from the Capital Markets Co. (CAPCO) of Belgium.
5.5 Depositoryacts as securities depository or “custodian” of listed shares of

stock that are traded at the stock exchange. This role is played by the
Philippine Depository and Trust Corp. (PDTC). It was organized to establish
a central depository in the Philippines and to implement scripless trading.
5.6 Settlement Banksaccept deposits of funds for payment of securities

bought, confirm payments of due clearing obligations to the clearing house,
debit buyer‟s cash account and credit seller‟s cash account during
settlement, and receive and/or return cash collateral put up by clearing
members to cover their daily trade negative exposures.
5.7 Transfer Agents. The stock transfer agent is considered the “official
keeper” of the corporate shareholder records. The stock transfer agents
provide the issuer or the listed company with a list of holders of its securities.
They effect transfer of beneficial ownership and process corporate actions
like stock or cash dividends, stock rights, stock splits, and collation of proxy
forms.
Figure 6. The Stock Market Participants
26
Davao del Norte
Telefax: (084) 655-9591, Local 116
Source: https://www.pseacademy.com.ph
6. Types of Stocks. One‟s ability to understand the attributes of stocks is crucialto

become successful in stock investing. Stocks are classified according to types and
classes, depending on the characteristics and earnings potential. Generally, stocks
are classified as follows:
6.1 According to Rights

 Common Stock or Ordinary Shares
 Preferred Stock or Preference Shares
6.2 According to Ownership

 Class A – shares that only Filipino investors can trade
 Class B – shares that can be traded by both Filipino and foreign investors
6.3 According to Sectors

 Financials Sector – includes companies engaged in banking, investments,
and finance.
 Industrial Sector – includes companies involved in the following: Electricity,
Energy, Power, and Water, Food, Beverage, and Tobacco, Construction,
Infrastructure, and Allied Services, Chemicals and Diversified Industrials
 Holding Firms Sector – includes companies or firms that control or manage
partial or complete interest in another company or other companies. Usually,
these companies do not produce goods or services itself; rather, its purpose
is to own shares of other companies.
27
Davao del Norte
Telefax: (084) 655-9591, Local 116
 Property Sector – includes companies involved in land and property

development
 Services Sector – includes companies involved in the following: Media,
Telecommunications, Information Technology, Transportation Services,
Hotel and Leisure, Education, and Diversified Services
 Mining and Oil Sector – includes companies engaged in mineral extraction,
oil exploration, extraction, and production
6.4According to Characteristics
 Blue Chip stocks – are shares of well-established and financially sound
companies that have demonstrated their ability to pay dividends in both good
and bad times. They also exhibit more modest but dependable returns and
are relatively of lower risk.
 Income stocks – are shares of those companies with good dividend
payment history due to steady profits. Since they are stable, income stocks
generally have a lower level of volatility.
 Growth stocks – also called “glamour stocks”, are shares of corporations
whose earnings are expected to grow at an above-average rate relative to
the market. A growth stock does not usually issue dividends as earnings are
reinvested in capital projects.
 Defensive stocks – are shares that provide regular dividends and stable
earnings, regardless of the overall condition of the stock market. Defensive
stocks remain stable under difficult economic conditions. Generally, these
are stocks of food, oil, and utilities companies, which are characterized by
steady demand amidst hard times.
 Cyclical stocks – are those sensitive to business conditions or cycles
strongly tied with the economy‟s performance. These companies produce or
offer services that are low in demand during slowdown and increase when
business peaks.
 Speculative stocks – are those that rise quickly when economic growth is
strong and falls rapidly when growth is slowing down. A speculative stock is
considered very risky because of its volatility. It increases or decreases
rapidly depending on the economic conditions.
7. The Philippine Stock Exchange (PSE) is the only stock exchange in the
Philippines and considered as one of the oldest stock exchanges in Asia, operating
since 1927 as the Manila Stock Exchange. Its trading floor is currently located at
the PSE Tower in Bonifacio Global City, Taguig City. It is composed of a 15-man
Board of Directors with Jose T. Pardo as the Chairman.
PSEi is the main index for PSE. It is composed of a fixed basket of thirty (30) listed
companies usually referred as blue chips companies. The PSEi measures the
relative changes in the free float-adjusted market capitalization of the 30 largest and
most active common stocks listed at the PSE. Blue chip companies are selected
based on a specific set of public float, liquidity, and market capitalization criteria.
Trading starts at 9:30AM with a recess at 12:00NN-1:30PM and continues until the
close at 3:30 PM.
History of PSE. The Philippine Stock Exchange was formed in December 23, 1992
from the country‟s two former stock exchanges, the Manila Stock Exchange (MSE),
28
Davao del Norte
Telefax: (084) 655-9591, Local 116
established on August 8, 1927, and the Makati Stock Exchange (MkSE), which was
established on May 27, 1963.
It was transformed from a non-profit, non-stock, member-governed organization into

a shareholder-based, revenue-earning corporation headed by a president and a
board of directors in 2001, one year after the enactment of the Securities
Regulation Code.
8. How to invest in the stock market. The following are the steps on how to invest
in the Philippine stock market:
Step 1 -Choose a stockbroker. It is important for an investor to choose a

stockbroker whom he trusts because stockbrokers would act as the
investor‟s representative in the stock market. Stockbroker also offers
services such as access to market reports/studies, on-time delivery of
important documents, and advise on investments. Stockbrokers can be
traditional or online (those with trading online facility). The PSE has a
complete list of information about all its trading participants who are
authorized and qualified to trade securities for investors.
Step 2 - Open an account. After choosing a stockbroker, the investor will then be
required to fill out a Customer Account Information Form and submit
identification papers for verification. Most stockbrokers will require
minimum deposit to activate the account. For traditional stockbroker, a
trader or agent will be assigned each investor to assist in either buying
or selling any listed security. However, for stockbrokers with online
trading facility, investor can post orders by himself.
Step 3 - Place an order. After opening an account, the investor is now ready to
trade in the stock market. In a traditional stockbroker, the investor will
give his order (whether buy or sell) to the trader. The trader will issue a
confirmation receipt. The buy or sell orders are relayed to the
stockbroker's dealer for execution. Meanwhile, in an online system as in
PSE, the order is keyed in through a trading terminal and automatically
matched. Confirmation of done trades - via phone, email or online - is
made as soon as possible and subsequently, an official confirmation or
invoice should be delivered to the investor.
Step 4 - Payment. For traditional stockbroker, the delivery or payment should be

made before the settlement date of T+3 (transaction date + 3 days).
Example, for transactions done on Monday, payment should be received
by Thursday. Meanwhile, for online stockbrokers, settlement of all
transactions is done on the transaction date. Most often, you cannot
execute a trade if you do not have buying power. Buying power is the
investor‟s total money in his account that is available for trading.
Settlement of accounts is performed by the clearing house.
Step 5 - Receipt of proceeds of sale of stocks or proofs of ownership of

stocks bought. In traditional trading, investor will receive the proceeds
29
Davao del Norte
Telefax: (084) 655-9591, Local 116
of sale after three days from the transaction date. However, for online
stockbrokers, it shall be credited to the investor‟s account as soon as the
transaction has been executed. If the investor wishes to have a physical
certificate of the stocks purchased, he can give instructions to the broker
and pay the required upliftment fee.
Akhter, A., &Sangmi, M. (2015). Stock market awareness among the educated
youth: A micro-level study in india. Vision, 19(3), 210-218.
doi:http://dx.doi.org/10.1177/0972262915593661
Philippine Stock Exchange. About pse. Retrieved last May 20, 2020 from
https://www.pse.com.ph.
PSE Academy. Basic stock investing. Retrieved last May 20, 2020 from
https://www.pseacademy.com.ph.
Let’s Check
Activity 1: Matching Type. Write the letter of the word/s in the box that would best
fit to the description in the statements below.
______1.This is where public corporations efficiently and cheaply get their needed
funds by selling to the supplier of funds (investors) their equity securities.
______2. Acts as an agent between a buyer and seller of stocks in the market.
______3. Companies whose shares of stock are traded on the Exchange.
______4. The “official keeper” of the corporate shareholder records.
______5. Shares that only Filipinos can trade
_____ 6.This includes companies engaged in mineral extraction, oil exploration,
extraction, and production
______7. Shares of well-established and financially sound companies that have
demonstrated their ability to pay dividends in both good and bad times.
______8. Stocks that rise quickly when economic growth is strong and falls rapidly
when growth is slowing down.
______9. Stocks that provide regular dividends and stable earnings, regardless of
the overall condition of the stock market.
______10. The only stock exchange in the Philippines
30
Davao del Norte
Telefax: (084) 655-9591, Local 116
a. Mining and Oil sector e. Speculative h. Blue chips

b. Class A f. Transfer agent i. Listed
c. Stock broker g. PhilippineStock j. Defensive
d. Stock market Exchange
Activity 2: Finding a stockbroker.
I. List down atleast 5 stockbrokers in the Philippines. Describe each briefly

including their minimum deposit requirement for opening an account.
Name of Stockbroker Description

1.
2.
3.
4.
5.
II. If you are to invest in the stock market, to which stockbroker would you prefer to
open a trading account? Rationalize your choice.
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
Let’s Analyze
Activity 1: Finding Blue Chip Stocks.
I. Make a research to identify companies listed in the Philippine Stock Exchange

that are considered blue chips. If you are to invest to at least five (5) of these
31
Davao del Norte
Telefax: (084) 655-9591, Local 116
companies, what companies would you prefer? Briefly discuss your reason of
choosing such companies.
Name of Company Reason of choosing the company

1.
2.
3.
4.
5.
II. Review your blue chip stocks selection and identify the sector to which they
belong.
Name of Company Sector

1.
2.
3.
4.
5.
III. Review sectors of the blue chip stocks you have selected. Do your chosen
stocks belong to the same sector or not? Are you convinced that you have selected
the best companies that can maximize your earning potential while investing in the
stock market? Discuss your conviction.
_____________________________________________________________
38
Davao del Norte
Telefax: (084) 655-9591, Local 116
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
Activity 2. Write the role of each market participants in the stock market.
Market Participants Role in the Stock Market
Investors
Stockbrokers
Listed Companies
Clearing House
Depository
Settlement Banks
Transfer Agents
39
Davao del Norte
Telefax: (084) 655-9591, Local 116
In a Nutshell
Let us summarize your understanding in this section by answering the following

questions:
1. The companies will benefit for being listed in the stock market because…
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
2. Listed companies obtain funds through the stock market by...
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
3. An investor earns from investing in the stock market through…
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
4. An investor can invest in the stock market by...
_____________________________________________________________
40
Davao del Norte
Telefax: (084) 655-9591, Local 116
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
5. If given a chance, you would like to invest your money in the stock market
because…
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
Q&A List
1.
2.
3.
4.
5.
Keyword Index
Best efforts underwriting Philippine Stock Exchange
Clearing house Stock brokers
Depository Stock market
Firm commitment underwriting Transfer agents
Listed companies
41
Davao del Norte
Telefax: (084) 655-9591, Local 116
Big Picture in Focus: ULOb.Apply strategies in performing virtual

stock trading.
Metalanguage
For you to demonstrate ULOb, you will need operational understanding of the terms
enumerated below.
1. Fundamental analysisis a method of measuring a real valueof a company‟s
stocks taking into consideration the relevant economic and financial factors.
2. Technical analysisis a method that uses charts of historical price and market
statistics to examine and ultimately to predict price movements in the financial
markets.
3. Stock ticker is a real time report of the price of the stocks being traded that is
updated continuouslythroughout the trading session.
4. Board Lot is a minimum number of shares that can be traded as designated by

the stock exchange.
5. Tick size is the minimum price movement of the share.
6. Order refers to a trade transaction which can be buy order or sell order.
7. Stock Symbol refers to the symbol or codedesignated to a listed company

which will be used for trading transactions.
Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the 4thand 5th
1. The Basics ofstock investing. Investing in stock market provides an opportunity

to make money.However, it should be noted that investment in stocks is risky
because of market volatility. Hence, one should be equipped with proper knowledge
and risk management before diving into the market. There are also different types
of investors in the stock market based on their investment motive and risk appetite:
long-term investors or short-term traders (those who usually take advantage of the
fluctuations in prices). It is also worth to mention that in the Philippines, we do not
42
Davao del Norte
Telefax: (084) 655-9591, Local 116
have short selling yet. Hence, we can also earn from fluctuations in prices by
buying at a lower price and selling it at a high price.
2. Understanding the Trading Interface.Before we can trade, it is important to

familiarize features thatcan be commonlyobserved in most of thetrading platforms
offered by stockbroker.
Stock Ticker. When you open the website of Philippine Stock Exchange (PSE) and
click ticker, the encircled portion will appear in your screen – this is a stock ticker.
A ticker is a real time report of the price of the stocks being traded that is updated
continuouslythroughout the trading session.
Figure 7. Stock Ticker in the PSE website
Stock ticker
Figure 8. Stock Ticker Up-close
The stock ticker displays the real time trading transactions in the stock market:
 The first row displays the stock code of the listed companies being traded;
43
Davao del Norte
Telefax: (084) 655-9591, Local 116
 the second row displays the number of shares traded and the percentage
change in the stock price;
 while the third row displays the price at which the stock was traded.
The stock ticker also observes color coding to display the changes in the prices of
the stocks traded:
 Green color implies that the price of the share increased based on the last
trade.
 Red color means that the price of the share decreased based on the last
trade.
 Lastly, blue or yellow color means that there is no change in the price of the
stock.
Another important feature in the trading platform is the market summary found in
the left corner in the PSE website encircled in Figure 9. This feature reflects the
summary of changes in the stock market. It has four tabs, namely: Indices, Most
Active, Advances and Declines:
 Indices tab shows the summary of changes in PSEindex (composed of blue
chip stocks), all shares andstocks per sector. Hence,one can readily see the
changes that happen duringtrading session. Other trading platforms term this
as “Market” wherein aside from those mentioned, relevant international
indices like Dow Jones Industrial Average, Nasdaq, S&P 500, etc. are also
shown.
 Most Active tab shows the stocks with the most trading transactions during
the day. Also referred as “Actives”.
 Advances tab shows the stocks that reported the highest increases in price
during the day. Also referred as “Gainers”.
 Declines tab shows the stocks that reported the highest decreases in price
during the day. Also referred as “Losers”.
Figure 9. PSE website highlighting market summary
44
Davao del Norte
Telefax: (084) 655-9591, Local 116
Figure 10 shows a snapshot of an active trading account under COL Financial

highlighting features discussed in the previous page.
Figure 10. Sample Online Trading Platform of a Stockbroker

Stock ticker
Market Summary
3.Selecting the company to invest in. This is a crucial decision to make because
your potential earnings and losses will depend on it. Hence, it is important to
carefully evaluate companies to increase the chance of earning in the stock market.
In evaluating companies, one may use of the following evaluation tools:
fundamental analysis andtechnical analysis.
 Fundamental analysis –is a method of measuring a real valueof a

company‟s stocks taking into consideration the relevant economic and
financial factors. If one performs fundamental analysis, he will look at the
financial statements of the company or look for news that would have impact
to the company being evaluated.
 Technical analysis - is a methodthat uses charts of historical price and

market statistics to examine and ultimately to predict price movements in
the financial markets.The three type of charts are:
a. Line chart
b. Bar chart
c. Candlesticks chart –commonly used chart in doing technical analysis
Technical analysis considers the following prices:

O– open – the price of the first trade of the day
H– high – the highest price at which the stock was traded during the day
L– low – the lowest price at which the stock was traded during the day
C– close – the price of the last trade of the day
45
Davao del Norte
Telefax: (084) 655-9591, Local 116
To understand better how candlesticks are formed, it is imperative to be familiar with

its anatomy as shown in Figure 11.
Figure 11. Anatomy of a Candle Stick
Figure 11 shows the two types of candlesticks: a bullish candlestick (green) and a
bearish candlesticks (red). The real body of the candlestick is composed of the open
price and close price. In a bullish candlestick, open price is lower compared to the
close price indicating increase in price. On the other hand, in a bearish candlestick,
the open price is higher than the close price indicating decrease in the price of the
stock. Meanwhile, the low price and the high price are represented in the lower
shadow or upper shadow, respectively. Other traders would also call shadow as
“wick”. The top end of the upper shadow represents the highest price the stock was
traded during the day; whereas, the bottom end of the lower shadow represents the
lowest price at which the stock was traded during the day.
A sample of a candlesticks chart of Jollibee Foods Corporation (JFC) from

kisschart.com is shown in Figure 12.
46
Davao del Norte
Telefax: (084) 655-9591, Local 116
Figure 12. Candlesticks Chart of Jollibee Food Corporation
Candlesticks represent daily prices of JFC stocks. Green candles signify increases in
price as compared to the price the previous day. On the other hand, red candles
signify decreases in the price as compared to the price the previous day.Let us take
a closer look of the last candlestick of JFC as shown in Figure 13:
Figure 13: Closer Look of Candlesticks
High = 145.30
Open = 144.00
Close = 145.00
Low = 140.50
As shown in the figure, JFC reported 7,277 trades (transactions) during the
day.The number of shares traded is 2,809,030 with a value of
Php404,936,553. The price of the first transaction (referred as open price) is
Php144.00, the price during the day went down as low as Php140.50 (low
price) and went up as high as Php145.30 (high price) but the price of the last
transaction was Php145.00 (close price). Moreover, for the last 52 weeks,
47
Davao del Norte
Telefax: (084) 655-9591, Local 116
the lowest price of JFC (52wL) was Php91.10 while the highest price for the
last 52 weeks (52wH) was Php289.00.
Considering the close price on this day is Ph145.00, can you imagine what
will happen to the investment of an investor who was able to buy 1,000 JFC
shares previously at the lowest price of Php91.10? Yes, he could be reporting
an unrealized gain of Php53,900 (Php145.00-Php91.10=Php53.90 x 1,000
shares).
However, what about the investor who was able to buy 1,000 JFC shares at
the highest price of P289.00? Yes, for sure he has unrealized loss amounting
to Php144,000 (Php145.00-Php289.00= -Php144.00 x 1,000 shares).
With the actual illustration above, we can conclude that investment in stock
market is risky. Hence, proper risk management should be applied, and we
can only do that if we are equipped with proper knowledge.
4. Placing an Order. When placing an order, a stockbroker would need the

following:
 Type of order. The investor needs to specify his order whether:

a. Buy order –applicable when the investor will purchase shares
b. Sell order–applicable when the investor will dispose shares.
 Stock Symbol. Each company listed in the PSE has a designated stock
symbol. The investor needs to specify the stock symbol of his chosen
company whenever he places an order. Stocksymbols of some listed
companies in the PSE are as follows:
Table 1.Stock Symbols of Selected Listed Companies
Symbol Company Name
AC Ayala Corporation
AEV Aboitiz Equity Ventures, Inc.
AP Aboitiz Power Corporation
BDO BDO Unibank, Inc.
BPI Bank of the Philippine Islands
GLO Globe Telecom, Inc.
JFC Jollibee Foods Corporation
MBT Metropolitan Bank and Trust Company
MEG Megaworld Corporation
MER Manila Electric Company
MPI Metro Pacific Investments Corporation
PGOLD Puregold Price Club, Inc.
RLC Robinson Land Corporation
SECB Security Bank Corporation
SM SM Investments Corporation
48
Davao del Norte
Telefax: (084) 655-9591, Local 116
SMC San Miguel Corporation

TEL PLDT, Inc.
URC Universal Robina Corporation
 Number of shares. The investor needs to indicate the number of shares to
trade. All orders are subject to minimum number of shares as prescribed by
the board lot tableestablished by the PSE. Prices in the market may
fluctuate according to the set intervals (tick size)based on the price level of
the shares.
For example, you wish to enter a buy order for Jollibee Foods Corporation
(JFC). Since the current price of JFC is Php145.00, it falls under the bracket
of P100-P199.90 with a lot size of 10. Hence, you need to purchase at least
10 shares of JFC.
Tick size is the minimum price movement of the share. Thus, in the case of
JFC, if the price will go up in each movement price will be added by 0.10.
Hence, it becomes P145.10, then P145.20, P145.30 and so on.
Table 2. Board Lot Table

Market Price (in Php) Tick Size Lot Size
0.0001 to 0.0099 0.0001 1,000,000
0.0100 to 0.0490 0.0010 100,000
0.0500 to 0.2490 0.0010 10,000
0.2500 to 0.4950 0.0050 10,000
0.5000 to 4.9900 0.0100 1,000
5.0000 to 9.9900 0.0100 100
10.0000 to 19.9800 0.0200 100
20.0000 to 49.9500 0.0500 100
50.0000 to 99.9500 0.0500 10
100.0000 to 199.9000 0.1000 10
200.0000 to 499.8000 0.2000 10
500.0000 to 999.5000 0.5000 10
1000.000 to 1999.000 1.0000 5
49
Davao del Norte
Telefax: (084) 655-9591, Local 116
Market Price (in Php) Tick Size Lot Size
2000.000 to 4998.000 2.0000 5
5000.000 and UP 5.0000 5
Source: https://www.pse.com.ph
 Price. The investor needs to indicate price that he is willing to buy or sell the
stock to be bought or sold. Price may be specified or based on the market
depending on the type of order the investor want to post.
Type of Orders According to Price
a. Market Order is the buying or selling of stocks without a specified price, or

immediately at the prevailing market price when the order is executed,
whatever the price may be.
b. Limit Orderis entered with a specified price. Thus, allowing investors to
buy or sell at their desired buying or selling price levels.
c. Market on Opening/Closing Orderis accepted only during pre-open and
pre-close periods and executed at the opening/closing price of the
instrument.
d. Market-to-Limit Orderis an order entered for immediate execution at the
best price with whatever volume available and remaining quantity will be
queued as a limit order.
e. Stop Order is triggered when a specified price limit is reached. There are
two (2) kinds of stop orders:
 Stop Loss Orderstays inactive and is not displayed in the market until
a trade occurs at the order‟s trigger price.
 Stop Limit Orderis the same as the stop loss order however it
specifies two prices: the trigger price and the limit price
 Specify Trade Expiration/Validity. The investor needs to specify the validity

of the order. Orders can also be classified according to their validity as
follows:
a. Day Order (DAY)is valid until the end of the trading day only.
b. Good Till Cancelled (GTC)is valid until cancelled by the investor or trader
or until it has reached the set expiration date of the security.
c. Good Till Date (GTD) is valid until the date specified by the investor.
d. Good Till Week (GTW)is a type of limit order which is valid for seven(7)
calendar days.
e.Sliding Validity (SLIDING)is valid for 360 calendar days from the time it is
posted.
f.Fill-and-Kill (FAK)also referred to as „Execute-and-Eliminate Order‟, is
valid upon execution.
5. How to virtually trade in the stock market?
50
Davao del Norte
Telefax: (084) 655-9591, Local 116
Before trading using a real account, it is very common that traders/investors in

the stock market will practice their trading skills in a virtual trade or paper trade.
There are few sites that allows interested persons to experience the thrills of
investing in the stock market. Following the steps in this section will lead you to
open a virtual trading account and ultimately perform virtual stock trading. You
are also advised to perform the steps indicated below:
Step 1 – Go to www.kisschart.com/trade. This link will lead you to a virtual trading

platform as shown below. The data here are link with the of the PSE. Hence, if the
market is open, the prices reflected here are based on live data from PSE.
Figure 14. Paper Trade Platform of kisschart.com
Step 2 – Sign up. For you to retrieve your previous trading session, you need to
sign up by clicking “Signin” in the upper left corner of the platform encircled in
Figure 14. After clicking “Signin”, a message box will appear as shown in Figure 15.
Figure 15. Signing-up Process
51
Davao del Norte
Telefax: (084) 655-9591, Local 116
Choose one of the two alternatives, whether to sign up with you Facebook account
or through your Gmail account. As per experience, signing up with Facebook will be
more convenient. Although you may still choose the other alternative wherein you
need to input your Gmail account;either way you choose would lead you to having a
virtual trading account with a buying power of Php100,000. 😊
Step 3 –Select listed companies to invest in. The challenge in investing in stock
market lies in deciding to what company/companies are you going to invest your
money.
Since you are given a virtual cash of Php100,000, you need to select companies
that you believe are worthy to invest in. You may refer to the companies you have
previously selected in the activity from the preceding section. If you choose to
invest in more than one company, you mustalso decide how to allocate your money
to your chosen companies.
In relation to amount to be allocated per company, please bear in mind that in

trading, there is what we call 8K rule. This means that it is highly encourage that
the amount to be allocated to a certain stock should not be lower than Php8,000.
This is in consideration of the trading fees that the investor will spend in a particular
trade.It is believed that when 8K rule is followed investors will be able to maximize
the fixed costs associated in a trade.
Step 4 – Enter your order. If you have already chosen your companies to invest in,
you are now ready to execute your trade.
To place your buy order,click the Select a Stock field encircled in the figure below.
52
Davao del Norte
Telefax: (084) 655-9591, Local 116
After clicking the Select a Stock field, a drop-down menu of listed companies will
appear as shown below.
After the drop-down menu appears, you need to type in the stock code of the listed
company you have chosen and click enter. When the figure belong appears, you
can already click the “Buy” button.
53
Davao del Norte
Telefax: (084) 655-9591, Local 116
After clicking the “Buy” button, you will be directed to the figure shown in the next
page. Then, you need to specify the number of shares that you are going to invest.
This platform is designed already to follow the board lot rules. Hence, all you have
to do is to click +10 ten times, if you wish to purchase 100 JFC shares; whereas if
you choose to reduce your order to 90, you just have to click -10.
Moreover, please take note that in this virtual trading platform, your orders are
considered “Market Order”, which means that the price being tagged are based on
the on prevailing market price when the order is executed.
Lastly, observed that there are associated fees in every order (whether buy or sell)
as shown in the lower part of the figure.
54
Davao del Norte
Telefax: (084) 655-9591, Local 116
Observed that after specifying the number of shares to be purchased, total amount
to be paid with corresponding fees are already reflected. In this platform, you can
also track your available balance for trading.
After reviewing the correctness of your order, you can execute the trade by clicking
“Buy” at the bottom.
After executing your buy order, observed that the “My Portfolio” and “Order History”
have entries already. “My Portfolio” shows your active trades reflecting the stock
code, last price, average price (this represents your cost composed of purchase
price of the stocks plus fees), number of shares, total cost, market value and the
related profit/(loss) in amount and in percentage. With this, you would readily know
the status of your investment.
Meanwhile, “Order History” serves as a log of your trading activities and it reflects
all the trades that you have executed, the date and time of the execution can also
be traced in the order history.
Follow the same procedure to the rest of your chosen stocks. Also, the same
procedure will be followed when you are to sell/dispose your stocks except that
after inputting the number of shares to be sold, you must click on the sell button.
Congratulations for investing virtually in the stock market!
55
Davao del Norte
Telefax: (084) 655-9591, Local 116
Akhter, A., &Sangmi, M. (2015). Stock market awareness among the educated
youth: A micro-level study in india. Vision, 19(3), 210-218.
doi:http://dx.doi.org/10.1177/0972262915593661
Philippine Stock Exchange. About pse. Retrieved last May 20, 2020 from
https://www.pse.com.ph.
PSE Academy. Basic stock investing. Retrieved last May 20, 2020 from
https://www.pseacademy.com.ph.
Let’s Check
Activity 1: Identification. Identify the term/s being described in the statements

below.
_________________ 1.It is a method that uses charts of historical price and market
statistics to examine and ultimately to predict price movements in the
financial markets.
_________________ 2. The price of the first trade of the day.
_________________ 3. It is a real time report of the price of the stocks being

traded that is updated continuouslythroughout the trading session.
_________________ 4. the price of the last trade of the day.
_________________ 5. Itis a method of measuring a real valueof a company‟s

stocks taking into consideration the relevant economic and financial
factors.
_________________ 6. The minimum number of shares that can be traded as

designated by the stock exchange.
_________________ 7. A type of order which is entered with a specified price.
_________________ 8. A type of order which is valid until the end of the trading
day only.
_________________ 9. A type of order which is triggered when a specified price

limit is reached.
56
Davao del Norte
Telefax: (084) 655-9591, Local 116
_________________ 10. A type of order which is valid until cancelled by the

investor or trader or until it has reached the set expiration date of the
security.
Let’s Analyze
Activity 1. Virtual Stock Trading and Trading Diary. In this activity, you are
expected to trade virtually in the stock market and document it in a Trading Diary. It
will take three days (3 trading sessions) to complete this activity. Also, please take
note that this activity will be considered as your Research Requirement in this
course which is 15% of your grade.
Instruction:
Perform the procedures in pages 47-51 to open a virtual trading account. Document
the procedures you have performed with a Trading Diary. Your trading diary serves
as your documentation of your virtual trading activities. Every section of your
Trading Diary shall reflect the dates of your transaction, screen shots of the virtual
trading portfolio and narrative or description of your trading transactions.Your
Trading Diary shall include the following sections:
I. Virtual trading accountopening and portfolio building(Day 1)
a. Opening of virtual trading account. In this section, your guide question is

“How did I open my virtual trading account?” You include the date, the step-
by-step procedures with screen shots and narrative detailing how were you
able to open your virtual account.
b. Building-up your portfolio. In this section, your guide question is “How did I
build my portfolio? Identify first the listed companies you have chosen to
invest your Php100,000 virtual money with the related number of shares
you plan to buy. Then, document the process on how you were able to
purchase shares virtually. You include screen shots and narrative on how
you were able to do it.
In the last part of this section, youdiscuss how the experience made you
feel.
II. Portfoliomonitoring
After building your portfolio, the next thing to do is to monitor your

investment.
In next two days after building your portfolio, you take a screen shot of your
virtual portfolio each day.
Day 2- Make a trading journal indicate the date, the screen shot and a
narrative describing the status of your portfolio. In the last part, discuss how
the status of your portfolio makes you feel? Are you happy or sad? Optimistic
57
Davao del Norte
Telefax: (084) 655-9591, Local 116
or pessimistic about your portfolio?Do you wish to have invested your money
to other listed companies?
Day 3 - Make a trading journal indicate the date, the screen shot and a
narrative describing the status of your portfolio. After checking the status of
your portfolio, identify 1 or 2 stocks that you wish to sell.Discuss your reason
of deciding to sell the stock/s. Document your sell transaction include screen
shots and narratives.In the last part, discuss how the sell experience makes
you feel?
III. Reflection Paper on Virtual Trading Experience.
Prepare a Reflection Paper on your virtual trading experience. How do you

find the experience? Do you see yourself investing in the stock market in the
near future?
*Important Note: Please ensure that you can still retrieve your virtual portfolio
because we will still use it on the next section of this course.
Formatting Instruction:
Use MS Word.
Font style: Arial, Font size: 12, 1.5 Spacing, 1-inch margin each side,
Insert page number at bottom of the page (center) except for cover page
Include a cover page with the following text:
My Virtual Trading Diary
In partial fulfillment of the requirements of the course

ACC 212 – Financial Markets
Submitted by:
________ [your name]_____________
Submitted to:
____[your teacher‟s name]________
July 2020
58
Davao del Norte
Telefax: (084) 655-9591, Local 116
In a Nutshell
Based on the concepts presented, write the three remarkable lessons you learned
in this section.
1. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
2. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
3. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
Q&A List
1.
2.
3.
4.
5.
Keyword Index
Board lot Stock ticker
Fundamental analysis Technical analysis
Order Tick size
Stock symbol
59
Davao del Norte
Telefax: (084) 655-9591, Local 116
Big Picture C
Week 6-7: Unit Learning Outcomes (ULO): At the end of the unit, you are
expected to:
a. Apply commonly used techniques in assessing investment under
uncertainty.
b. Explain the impact of the firm‟s degree of operating and financial leverage
in making investment decisions.
Big Picture in Focus: ULOa.Apply commonly used techniques in

assessing investment under uncertainty.
Metalanguage
enumerated below.
1. Risk Management is the process of measuring or assessing risk and
developing strategies to manage it.
2. Decision Making under Certaintymeans that for every decision to make there
is only one event and therefore only a single outcome for each action.
3. Decision Making under Uncertaintyinvolves several events for each action

with its probability of occurrence.
4. Probability provides a method for mathematically expressing doubt or

assurance about the occurrence of a chance event.
5. Payoff (decision) tables are helpful tools for identifying the best solution given
several decision choices and future conditions that involve risk.
6. Perfect information is the knowledge that a future state of nature will occur
with certainty, being sure of what will occur in the future.
7. Sensitivity analysis describes how sensitive the linear programming optimal

solution is to a change in any one number.
8. Simulation is a technique for experimenting with logical and mathematical

models using a computer.
9. Decision tree is an analytical tool used in a problem in which a series of

decision has to be made at various time intervals, with each decision influenced
by the information that is available at the time it is made.
60
Davao del Norte
Telefax: (084) 655-9591, Local 116
Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the 6th and
7thweeks of the course, you need to fully understand the following essential
1. Risk Managementis the process of measuring or assessing risk and developing
strategies to manage it. It is a systematic approach in identifying, analyzing and
controlling areas with a potential for causing unwanted change.
According to the International Organization of Standardization (ISO 3100), risk

management is the identification, assessment and prioritization of risks followed by
a coordinated and economical application of resources to minimize, monitor and
control the probability and/or impact of unfortunate events and to maximize the
realization of opportunities.
ISO identifies the basic principles of risk management and that risk management
should:
1. Create value
2. Address uncertainty and assumptions
3. Be an integral part of the organizational processes and decision-making
4. Be dynamic, iterative, transparent, tailorable, and responsive to change
5. Create capability for continuous improvement
6. Be systematic, structured, and continually or periodically reassessed.
2. Risk Management Process. According to ISO, the risk management process

has the following steps:
1. Establishing the context.This involves identification of risks; planning the
risk management process;mapping out the social scope, identity and
objectives of stakeholders and basis upon risk will be evaluated; establishing
a framework; anddeveloping risks analysis and mitigation or solution of risks.
2. Identification of potential risks. This begins with the analysis of the source
of problem or the problem itself.
3. Risk assessment. After identifying the risk, the next thing to do is to
evaluate the potential severity of impact and the probability of occurrence of
the risk.
3. Elements of Risk Management. Ideal risk management should minimize

spending of manpower or other resources and the same time minimizing the effect
of risks. The performance of assessment methods should include the following
elements:
1. Identification, characterization and assessment of threats.
2. Assessment of the vulnerability of critical assets to specific threats
3. Determination of the risk
4. Identification of ways to reduce identified risks
5. Prioritization of risk reduction measures based on a strategy
61
Davao del Norte
Telefax: (084) 655-9591, Local 116
4. Potential Risk Treatments. As suggested in ISO 3100, once risks have been
identified and assessed, techniques to manage them should be applied. The
following are the four categories of risk:
1. Risk Avoidance. This includes performing an activity that could carry risk.
However, avoiding risks would also mean losing the opportunity to earn that
accepting (retaining) the risk may have allowed.
2. Risk Reduction. This is also referred as risk optimization which involves

reducing the severity of loss or the likelihood of the loss from occurring.
3. Risk Sharing. This means sharing with another party the burden ofloss or the
benefit of gain and the measures to reduce a risk.
4. Risk Retention. This involves accepting the loss or benefit of gain from a risk
when it occurs.
5. Investment Risks. The required return of an investment increases as the risk of

the investment increases. An investor would probably require risk premium as
compensation for taking the uncertainty associated with the investment. Some of
the factors that contribute to the investment uncertainty are the following:
1. Business risk. This refers to the uncertainty about the rate of return caused
by the nature of the business.
2. Financial risk. This is determined by the firm‟s capital structure or sources
of financing.
3. Liquidity risk. This is associated with the uncertainty created by the inability
to sell the investment quickly for cash.
4. Default risk. This is related to the probability that some or all of the initial
investment will not be returned.
5. Interest rate risk. This is the risk that fluctuations in interest rates will cause
fluctuations to the value of the investment.
6. Management risk.This is the risk associated with the decisions made the
management and board of directors of the firms.
7. Purchasing power risk. This is the risk that the value of the return from
investment has declined as a result of inflation.
6. The most used Techniques and Models in assessing investment

alternatives under risk or uncertainty are as follows:
1. Probability
2. Value of Information
3. Sensitivity Analysis
4. Simulation
5. Decision Tree
6. Standard deviation and Coefficient of Variation
7. Project Beta
Probability
62
Davao del Norte
Telefax: (084) 655-9591, Local 116
Decision Making under Certaintymeans that for every decision to make there
is only one event and therefore only a single outcome for each action. There is
100% chance of occurrence; hence, the probability is 1.0.
Decision Making under Uncertaintyinvolves several events for each action

with its probability of occurrence. The probability of occurrence maybe known to
the decision maker because of mathematical proofs and historical evidence;
otherwise, the decision maker may resort to subjective assignment of
probabilities.
Pay-off is the value assigned to different outcomes from a decision which may
be positive or negative. Information is deemed to meet the cost-benefit test if the
expected value of a decision increases as a result of obtaining additional
information. The process in deciding whether the cost-benefit criterion has been
met is called information economics.
Assigning Probabilities. Decision makers must assign probabilities to the

various outcomes that represent the likelihood of their occurrence. A probability
distribution describes the chance or likelihood of each of the collectively
exhaustive and mutually exclusive set of events. Probability provides a method
for mathematically expressing doubt or assurance about the occurrence of a
chance event. The probability of an event varies from 0 to 1.
 A probability of 0 means that the event cannot occur, whereas a probability

of 1 means that event is certain to occur.
 A probability between 0 and 1 indicates the likelihood of the event‟s
occurrence.
Basic terms used with probability
1. Mutually exclusive. This is the case when two events cannot occur
simultaneously.
2. Joint probability. This is the probability that the two events will both occur.
3. Conditional probability. This is the probability that one will occur given that
the other has already occurred.
4. Independent.This meansthat the occurrence of one has no effect on the
probability of the other.
Illustrative problem. Decision Making under Uncertainty
M & O Corporation is considering two new designs for their kitchen utensil
products – Product A and Product B. Either can be produced using the present
facilities. Each product requires an increase in annual fixed cost of P4,000,000.
The products have the same selling price of P1,000 and the same variable costs
per unit of P800.
After studying past experience with similar products, management has prepared
the following probability distribution:
63
Davao del Norte
Telefax: (084) 655-9591, Local 116
Event Probability for

(Units Demanded) Product A Product B
5,000 0.0 0.1

10,000 0.1 0.1
20,000 0.2 0.1
30,000 0.4 0.2
40,000 0.2 0.4
50,000 0.1 0.1
1.0 1.0
Management would like to know which product should be chosen, assuming

the objective is to maximize the expected operating income.
Solution:
 Using the given probability distribution, determine the expected
demand for the two products:
 After determining the expected demand of each product, the expected

operating income should be computed:
Based on the computations presented, Product B should be chosen

because its expected income is higher by P100,000 compared with
Product A.
64
Davao del Norte
Telefax: (084) 655-9591, Local 116
Payoff (Decision) Tables
Payoff (decision) tables are helpful tools for identifying the best solution given
several decision choices and future conditions that involve risk. It presents the
outcomes (payoffs) of specific decisions when certain states of nature (events not
within the control of the decision maker) occur.
Illustration. A dealer in luxury yachts may order 0, 1 or 2 yachts for this season‟s
inventory. The cost of carrying each excess yacht is P50,000 and the gain for each
yacht sold is P200,000. The situation may be described by a payoff table as follows:
The payoff table can be interpreted as follows: If the dealer decides not to order
yacht, it means that regardless of the actual demand, he will not incur any gain or
loss. However, he misses an opportunity to earn in case there will be actual
demand.If the dealer decides to order 1 yacht and there is no actual demand, he
will be incurring a carrying cost of P50,000 and will report a loss of the same
amount. However, if there will be 1 actual demand, he will earn P200,000. Also, if
there will be 2 actual demands of yacht, the dealer would still be earning P200,000.
Lastly, if the dealer decides to order 2 yachts and there will be no actual demand,
the dealer will be incurring carrying cost of P50,000 for each yacht. Hence, he will
be reporting a loss of P100,000. If there is an actual demand for 1 yacht, the dealer
will earn P200,000; however it will also incur P50,000 for the carrying cost of unsold
yacht. Hence, he will have net earnings of P150,000. Lastly, if the actual demand
for yacht is 2 then the dealer will maximize his earnings to P400,000.
Assuming the probabilities of the season‟s demand are as follows:

Demand Probability
0 0.10
1 0.50
2 0.40
The expected value (EV) of each decision can be computed as follows:
Order 0 Order 1 Order 2

0.1 x 0 = 0 0.1 x P(50,000) = ( P5,000) 0.1 x P(100,00) = P(10,000)
0.5 x 0 = 00.5 x 200,000 = 100,000 0.5 x 150,000 = 75,000
0.4 x 0= 0 0.4 x 200,000 = 80,000 0.4 x 400,000 = 160,000
EV = 0 EV = P175,000 EV = P225,000
If the decision will be based on expected value, the dealer should order 2 yachts
since it has the greatest expected value.
65
Davao del Norte
Telefax: (084) 655-9591, Local 116
Expected Value of Perfect Information
Based on the previous illustrations, management can decide under uncertainty

using the expected value. The alternative that has higher expected value should be
chosen if management wants to maximize its earnings potential. However, there
are times wherein the management or owners do not want to be exposed to risk
and wish to decide only when they are already certain of the conditions at hand. In
this case, the management may decide to hire market analysts to obtain additional
information on the environmental situation; hence, trying to find a perfect
information.
Perfect information is the knowledge that a future state of nature will occur with
certainty, being sure of what will occur in the future. Before deciding to obtain the
perfect information, the management should consider how much is the expected
value of perfect information (EVPI) which can be computed as follows:
EVPI = EV without PI – Expected Value of Return for best action to take with PI
The expected value of perfect information represents that amount the company is
willing to pay to the market analysts‟ error-free advice. The company should
evaluate whether it is worthy to obtain perfect information and they will just pursue
marketing research if the amount they will spend in it is less than the benefits that
they will get if they will have perfect information. However, it should be noted that
“perfect information” is not perfect in the sense of absolute predictions.
Illustration.Using the information of the yacht dealer, assume that he was able to
poll all potential customers and they truthfully stated that whether they would
purchase a yacht this year, what is the greatest money that the dealer should pay
for this information? What is EVPI?
EVPI can be computed as follows:
1. Based on the payoff table, compute the expected value of the best choice
under each state of nature.
Best Action Expected Value
Pr State of Nature Best Action Pay-off (Pr x Pay-off)
0.1 Demand =0 Buy =0 P 0 P 0
0.5 Demand =1 Buy =1 200,000 100,000
0.4 Demand =2 Buy =2 400,000 160,000
EV of the best choice = P260,000
Hence, with perfect information about future demand, the dealer expects to
make P260,000. While the choice with best expected value under uncertainty is
P225,000 as previously computed.
2. The expected value of perfect information (EVPI) can then be computed as

follows:
66
Davao del Norte
Telefax: (084) 655-9591, Local 116
Expected value with perfect information P260,000

Less: Expected value of the best choice (under uncertainty) 225,000
Expected value of perfect information (EVPI) P 35,000
This means that the dealer will NOT pay more than P35,000 to obtain
information about future demand because it will be more profitable to make the
expected value choice than to pay more to obtain the perfect information.
Sensitivity Analysis
Sensitivity analysis describes how sensitive the linear programming optimal solution
is to a change in any one number. It answers what-if questions about the effect of
change in prices or variable costs; changes in value; addition or deletion of
constraints, such as available machine hours; and changes in industrial coefficients,
such as the labor-hours required in manufacturing in a specific unit.
A trial and error method may be adopted in which sensitivity of the solution to
changes in any given variable, parameter or other assumption is calculated. In
linear programming problems, sensitivity is the range within which a constraint
value, such as a cost efficient or any other variable, may be changed without
changing the optimal solution.
Simulation
Simulation is a technique for experimenting with logical and mathematical models

using a computer. It involves experimentation that is an organized trial and error
using a model of the real world to obtain information prior to full implementation.
Models can be classified as:
c. Physical models include automobile mockups, airplane models used for

wind-tunnel tests and breadboard models of electronic circuit
d. Abstract models may be pictorial (architectural plans), verbal (a proposed
procedure), or a logical-mathematical.
Five steps in simulation procedure are as follows:

1. Define the objectives
2. Formulate the model
3. Validate the model
4. Design the experiment
5. Conduct the simulation
SIMULATION
Advantages Limitations
1. Time can be compressed. 1.Simulation model can be costly to
2. Alternative policies can be explored. develop.
3. Complex system can be analyzed. 2. Risk of error.
67
Davao del Norte
Telefax: (084) 655-9591, Local 116
Decision Tree
A decision tree is an analytical tool used in a problem in which a series of decision

has to be made at various time intervals, with each decision influenced by the
information that is available at the time it is made. It is a diagram that shows the
several decisions or acts and the possible consequences called events of each act.
In a more elaborate form, the probabilities and the revenue and costs of each
event‟s outcome are estimated and these are combined to give an expected value
for the event.
DECISION TREE ANALYSIS

Advantages Limitations
1. An effective means of presenting the 1. It does not give management the
relevant information needed in an answers to investment problem.
investment problem. 2. It does not identify all the possible
2. Combination of action choices with events or does it list all the decisions
different events or results of action that must be made on a subject under
chance or other uncontrollable analysis.
circumstances partially affect can be 3. The interactions of such decision with
better presented and studied. the objective of other parts of the
3. The interactions of the impact of the business organization would be too
future events, decision alternatives, complicated to compute manually.
uncertain events and their possible 4. It treats uncertain alternatives as if
payoffs can be shown with greater ease they were discrete well-defined
and clarity. possibilities when uncertain situations
4. Data are presented in a manner that depend on several variables subject to
enables systematic analysis and better such chance influences.
decisions.
Cabrera, M. B. (2015). Financial management principles and applications volume 2.

Manila: GIC Enterprises & Co., Inc.
68
Davao del Norte
Telefax: (084) 655-9591, Local 116
Let’s Check
Activity 1:Multiple Choice. Write the letter of your choice in the space provided
before the number.
_______ 1. The risk that securities cannot sold at a reasonable price on short
notice is called
a. Default risk c. Purchasing-power risk
b. Interest rate risk d. Liquidity risk
_______ 2. The type of risk that is not diversifiable and affects the value of a
portfolio
a. Purchasing-power risk c. Non-market risk
b. Market risk d. Interest rate risk
_______ 3. Which of the following are components of interest rate risk?
a. Purchasing-power risk and default risk
b. Price risk and market risk
c. Portfolio risk and reinvestment-rate risk
d. Price risk and reinvestment-rate risk
_______ 4. This is a helpful tool for identifying the best solution given several
decision choices and future conditions that involve risk.
a. Sensitivity analysis c. Payoff table
b. Decision tree analysis d. Simulation
_______ 5. This is a technique for experimenting with logical and mathematical
models using a computer.
_______ 6. This describes how sensitive the linear programming optimal solution to
a change in any one number.
_______ 7. This is an analytical tool used in a problem in which a series of decision
has to be mage at various time intervals.
_______ 8. The amount that an investor is willing to pay to reduce if not eliminate
uncertainty.
a. Payoff c. Expected value of perfect information
b. Fixed cost d. Expected value of net investment
_______ 9. This describes the chance or likelihood of each of the collectively
exhaustive and mutually exclusive set of events.
a. Expected value c. Payoff
b. Probability d. Probability distribution
_______ 10. Two events that cannot occur simultaneously
a. Joint Probability c. Conditional probability
b. Mutually exclusive d. Independent
69
Davao del Norte
Telefax: (084) 655-9591, Local 116
Let’s Analyze
Activity 1. Read and answer the problems.
Problem 1. 3K Company is considering the introduction of a new product. The

anticipated demand, probability of demand and profits for each are given below.
Product X Product Y
Product Probability of Profit Product Probability of Profit
Demand Demand (Peso) Demand Demand (Peso)
(units) % %
50,000 20 -8,000 30,000 15 -12,000

60,000 10 -5,000 40,000 15 -10,000
70,000 30 11,000 50,000 40 14,000
80,000 20 14,000 60,000 20 16,000
90,000 20 17,000 70,000 10 16,000
Required:
10. Compute the expected value of the profits of Product X and Product Y.
Product X Product Y
11. Based on the computation, which product would you choose to pursue?
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
70
Davao del Norte
Telefax: (084) 655-9591, Local 116
Problem 2. A beverage stand can sell either soft drinks or coffee on any given day.
If the stand sells soft drinks and the weather is hot, it will make P2,500; if the
weather is cold, the profit will be P1,000. If the stand sells coffee and the weather
is hot, it will make P1,900; if the weather is cold, the profit will be P2,000. The
probability of cold weather on a given day at this time is 60%.
Required:
2.1 Compute for theexpected payoff for selling coffee.
2.2 Compute for the expected payoff if the vendor has perfect information.
2.3 Compute for the expected value of perfect information.
2.4 What advise can you give to the beverage stand owner, if somebody offered him
to do research and obtain the perfect information at a cost of P1,000?
In a Nutshell
Based on the concepts presented, write the three remarkable lessons you learned
in this section.
1. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
2. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
71
Davao del Norte
Telefax: (084) 655-9591, Local 116
_____________________________________________________________
_____________________________________________________________
3. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
Q&A List
1.
2.
3.
4.
5.
Keyword Index
Decision tree Probability

Decisions under certainty Sensitivity analysis
Decisions under uncertainty Simulation
Pay-off table Risk management
Perfect information
72
Davao del Norte
Telefax: (084) 655-9591, Local 116
Big Picture in Focus: ULOb. Explain the impact of the firm‟s degree
of operating and financial leverage in making investment decisions.
Metalanguage
For you to demonstrate ULOb, you will need operational understanding of the
1. Leverage. This represents the fixed costs items to magnify the firm‟s results
which could be related to the determination of the amount of fixed cost
related to plant and equipment or determination of how to finance the
business.
2. Operating leverage. This is a measure of how sensitive net operating
income is to a given percentage change in peso sales.
3. Financial leverage. This reflects the amount of debt used in the capital
structure of the firm.
Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the 6th and7th
knowledge lay down in the succeeding pages. Please note that you are not limited
1. Leverage in Business. An individual who wishes to establish a business is
faced with two primary decisions to make. First is to determine the amount of fixed
cost related to plant and equipment shall be used in the production process
(operating leverage). If the entity will install modern, sophisticated equipment, it
can virtually eliminate labor in the production. Hence, if the production volume is
high, this set up would be favorable to the entity as most of its costs are just fixed
payments for plant and equipment.
The other decision to make is to determine how the business shall be financed
(financial leverage). If the business will rely on debt financing and the business is
successful, the entity will generate substantial profits for the owner since it will
only be paying fixed costs of debt.
2. Operating Leverage. Operating leverage is a measure of how sensitive net

operating income is to a given percentage change in peso sales. It acts as
multiplier. If the operating leverage is high, a small percentage increase in sales
can produce a much larger percentage increase in net operating income.
73
Davao del Norte
Telefax: (084) 655-9591, Local 116
The degree of operating leverage can be computed as:
Degree of operating leverage = Contribution Margin

Net Operating Income
To illustrate, let us consider the following problem:
Voltage Company manufactures and sells a specialized cordless telephone for

high electromagnetic radiation environments. The company‟s contribution format
income statement for the most given year is given below:
Total Per Unit Percent of

Sales
Sales (20,000 units) P1,200,000 P60 100%

Variable expenses 900,000 45 75%
Contribution margin 300,000 15 25%
Fixed expenses 240,000
Net operating income 60,000
A potential investor is eyeing to invest in Voltage Company. However before

investing, he wants to know how sensitive the net operating income of the
company in relation to its saleshas asked an analysis of a number of items.
1. What is the company‟s degree of operating leverage at the present level of

sales? What does this mean?
2. Assume that through a more intense effort by the sales staff, the company‟s
sales increase by 8% next year. Using the degree of operating leverage, by
what percentage would you expect net operating income to increase?
Solution:
1. Degree of operating leverage = Contribution Margin

Net Operating Income
= 300,000
60,000
= 5 times
This means that the net operating income will change 5 times given an increase in
sales.
2. Hence, the expected increase in net operating income is computed as follows:
Expected increase in sales 8%

Degree of operating leverage x5
Expected increase in net operating income 40%
74
Davao del Norte
Telefax: (084) 655-9591, Local 116
Thus, using the degree of operating leverage, the expected net operating income if
the sales increase by 8% is computed as follows:
Net operating income (current year) P60,000

Expected increase in net operating income (P60,000 x 40%) 24,000
Expected net operating income next year if sales will increase by 8% 84,000
You can verify the answer by preparing a forecasted income statement given the
8% increase in sales. Understanding the impact of the company‟s degree of
operating leverage, will help a potential investor to assess the sensitivity of the net
operating income to sales. This means that if the trend of the company‟s sales is
increasing, the investor would most likely to invest if the degree of operating
leverage is high because he can expect a higher net operating income. However, if
the trend of the company‟s sales is decreasing, then the investor would most likely
to shy away from investing in such company since if its degree of operating
leverage is high, it is expected that its net operating income will be greatly affected
with the decrease in sales.
Alternative way of computing the degree of operating leverage is as follows:
Degree of operating leverage = Percent change in operating income

Percent change in volume
3. Financial Leverage. Financial leverage reflects the amount of debt used in the
capital structure of the firm. Since debt carries a fixed obligation of interest
payments, there is an opportunity to greatly magnify results at various levels of
operations. If operating leverage is affecting the left hand side of the statement of
financial position, financial leverage is affecting the right hand side.
Impact on Earnings
Suppose that the firm is evaluating two financial plans, each employing a
significantly different amount of debt in the capital structure. Financing totalling
P200,000 is required to carry the assets of the firm.
TOTAL ASSETS – P200,000

Plan A Plan B
(Leveraged) (Conservative)
Debt (8% interest) P150,000 (P12,000 interest) P50,000 (P4,000 interest)
Ordinary shares 50,000 (8,000 shares 150,000 (24,000 shares
@P6.25) @P6.25)
Total Financing P200,000 P200,000
Under leveraged Plan A, the entity will borrow P150,000 and sell 8,000 shares at
P6.25 to raise an additional P50,000, whereas, conservative Plan B calls for
borrowing only P50,000 and acquiring an additional P150,000 by issuing 24,000
shares.
75
Davao del Norte
Telefax: (084) 655-9591, Local 116
76
Davao del Norte
Telefax: (084) 655-9591, Local 116
It can be observed from the results shown in the table that even if both plans
assume the same operating income, the impact of the two financing plans is very
substantial. It is evident that the conservative financial plan will produce better
results at low income levels but the leveraged financial plan will generate higher
earnings per share as operating income or EBIT goes up. The firm will be
indifferent between the two plans if the EBIT level is P16,000.
Degree of Financial Leverage
The degree of financial leverage measures the effect of a change in one variable
to another variable. It can be computed by using any of the following formulas:
1. Degree of financial leverage (DFL) = Percent change in EPS

Percent change in EBIT
2. Degree of financial leverage (DFL) = EBIT

EBIT - Interest
Using the formula, the degree of financial leverage for Plan A and Plan B at EBIT
level of P36,000 can be computed as follows:
Plan A (Leveraged)
DFL = = 36,000 = 36,000 = 1.5

36,000 – 12,000 24,000
Plan B (Leveraged)
DFL = = 36,000 = 36,000 = 1.1

36,000 – 4,000 32,000
As computed, Plan A has a much higher degree of financial leverage since its
assets are financed with more debt. At an EBIT level of P36,000, a 1% increase in
earnings will produce a 1.5% increase in earnings per share under Plan A but only
1.1% increase under Plan B.
It should be pointed out that debt financing and financial leverage offer unique
advantages, but only up to a point that debt financing may not be detrimental to
the firm. As an entity expand the use of debt in their capital structure, lenders will
perceive a greater financial for the firm. Hence, they may raise the average
interest rate to be paid and they may demand that certain restrictions be placed
on the corporation. Moreover, concerned common stockholders may drive down
the price of the stock forcing the company away from the objective of maximizing
the firm‟s overall value in the market. Lastly, the impact of financial leverage must
be carefully weighted by firms with high debt.
77
Davao del Norte
Telefax: (084) 655-9591, Local 116
4. Combining Operating and Financial Leverage
The degree of combined leverage (DCL) uses the entire income statement and
shows the impact of a change in sales or volume on bottom-line earnings per
share. It summarizes the effect of both operating and financial leverage. The
higher its value, the more vulnerable a company is for a decrease in sales.
Observethat the profitability of the firm increases as the firm‟s sale increasesfrom
P160,000 (80,000 units) to P200,000 (100,000 units).
Sales (P2 per unit x 80,000 units) P160,000 P200,000

Less: Fixed Costs 60,000 60,000
Variable Cost (P0.80 per unit) 64,000 80,000
Operating Income (EBIT) 36,000 60,000
Less: Interest 12,000 12,000
Earnings before taxes 24,000 48,000
Less: Taxes 12,000 24,000
Earnings after taxes 12,000 24,000
Shares 8,000 8,000
Earnings per share 1.50 3.00
Based on the above illustration, we can compute the degree of combined

leverage by using any of the following formulas:
1. Degree of combined leverage (DCL) = Percent change in EPS

Percent change in Sales (or Volume)
Thus, the computation of the degree of combined leverage using the formula is
as follows:
1.50
DCL = 1.50 x 100 = 100% =4
40,000 25%
160,000 x 100
2. Degree of combined leverage (DCL)= Q (SP/unit – VC/unit Cost)

Q (SP/unit – VC/unit) – FC – Interest
Thus, the computation of the degree of combined leverage using the formula is
as follows:
DCL = 80,000 ( P2 – P.80) = 96,000 =4

80,000 (P2-P.80) – P60,000 – P12,000 24,000
78
Davao del Norte
Telefax: (084) 655-9591, Local 116
This means that in every percentage point change in sales, a 4% change in

earnings per share at this level of operation. Hence, it would be better to use
combined leverage in evaluating an entity because it already take into
consideration both the operating leverage and the financial leverage.

Manila: GIC Enterprises & Co., Inc
Let’s Check
1. This refers to the total impact of operating and financial leverage.

a. degree of operating leverage c. degree of combined leverage
b. degree of financial leverage d. degree of mixed leverage
2. This is a measure of the impact of debt on the earnings capability of a firm
3. This is a measure of the impact of fixed costs on earnings from the operation‟s
viewpoint of a firm
4. A factory that relies on highly technical machinery may choose to reduce its
overall leverage position by
a. selling its machinery.
b. increasing its accounts receivable.
c. utilizing a higher level of equity.
d. decreasing their variable costs per unit.
5. Under which of the following conditions could the overuse of financial leverage be
detrimental to the firm?
a. In a stable industry.
b. When there is cyclical demand for the firm's products.
c. During an upswing in the business cycle.
d. When there is low-interest cost compared to return on assets.
6. Which of the following is not true about leverage?
a. Operating leverage influences the top half of the income statement,
determining EBIT.
b. Financial leverage deals with the bottom half of the income statement,
determining EPS.
c. Combined leverage utilizes the entire income statement, showing the impact of
change in volume on EBIT.
d. None of the options
79
Davao del Norte
Telefax: (084) 655-9591, Local 116
7. Financial leverage deals with

a. the relationship between fixed and variable costs.
b. the relationship between debt and equity in the capital structure.
c. the entire income statement.
d. the entire balance sheet.
8. If EBIT equals $200,000 and interest equals $40,000, what is the degree of
financial leverage?
a. 5.33x
b. 1.25x
c. .8125x
d. 4.33x
9. The degree of operating leverage is computed as
a. percent change in operating profit divided by percent change in net income.
b. percent change in unit volume divided by percent change in operating profit.
c. percent change in EPS divided by percent change in operating income.
d. percent change in operating income divided by percent change in unit volume.
10. Which of the following statements is correct? As a firm increases the operating
leverage used to produce a given quantity of output, this will
a. normally lead to a decrease in its business risk
b. normally lead to a decrease in the standard deviation of its expected EBIT
c. normally lead to a reduction in its fixed assets turnover ratio
d. normally lead to an increase in its fixed assets turnover ratio
Let’s Analyze
Problem 1
The following information is available for the Blue and Red Companies for 2019.
Blue Red
Sales (200,000 units) P1,800,000 P1,800,000
Variable costs 800,000 1,200,000
Contribution margin 1,000,000 600,000

Fixed costs 500,000 100,000
Net operating income P500,000 P500,000
Required:
1. Compute the operating leverage for each company.
80
Davao del Norte
Telefax: (084) 655-9591, Local 116
2. Which company will be greatly affected if there are changes in its sales? Discuss
why?
3. Assume that sales will increase by 10%, what would be the expected net
operating income for Blue Company and Red Company, respectively? Use the
degree of operating leverage in your computation.
Problem 2
Firm A has P10,400 in assets entirely financed with equity. Firm B also has P10,400
in assets, but these assets are financed by P5,200 in debt (with a 10% rate of
interest) and P5,200 in equity. Both firms sell 14,000 units of output at P2.80 per
unit. The variable costs of production are P1, and fixed production costs are
P11,000.Assume an income tax rate of 30%.
Required:
1. What is the operating income (EBIT) for both firms?
2. Compute for the degree of financial leverage of both firms. Which firm is more
vulnerable to changes in sales? Explain why.
3. Compute for the degree of combined leverage of both firms. Explain what does it
imply?
4. If sales increase by 15% to 16,100 units, by what percentage will each firm's
earnings after interest increase?
5. Why are the percentage changes different?
6. How can we use the degree of combine in evaluating potential investment

opportunities?
81
Davao del Norte
Telefax: (084) 655-9591, Local 116
In a Nutshell
Based on the concepts presented, write the three remarkable lessons you learned.
1. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
2. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
3. _____________________________________________________________
_____________________________________________________________
____________________________________________________________
Q&A List
1.
2.
3.
4.
5.
Keyword Index
Degree of combined leverage
Financial leverage
Leverage
Operating leverage
82
Davao del Norte
Telefax: (084) 655-9591, Local 116
Big Picture D
Week 8-9: Unit Learning Outcomes (ULO): At the end of the unit, you are
expected to:
a. Quantify risk and analyze risk-return relationship.
b. Apply Capital Asset Pricing Model (CAPM) concepts in evaluating
investments.
Big Picture in Focus: ULOa. Quantify risk and analyze risk-return

relationship.
Metalanguage
For you to demonstrate ULOb, you will need operational understanding of the terms
enumerated below.
1. Risk refers to the chance that some unfavorable event will occur.
2. Expected portfolio return is the weighted average of the expected returns

from the individual assets in the portfolio.
3. Standard deviation can be used as a measure of the amount of absolute risk

associated with the outcome.
4. Coefficient of variation is a standardized measure of the risk per unit of return.
5. Portfolio is an investment consists of different assets.
6. Portfolio risk is the variability of returns of the portfolio as a whole.
7. Diversification is investing in more than one type of asset to reduce risk.
8. Correlation coefficient is a relative statistical measure of correlation in the

degree and direction of change between two variables.
Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the 6th and 7th
83
Davao del Norte
Telefax: (084) 655-9591, Local 116
1. Basic Risk and Return Concept
Risk refers to the chance that some unfavorable event will occur. There is risk
whenever future outcomes are not completely certain. In finance, risk is associated
with the variability of an asset‟s return. Hence, if there is possibility that the actual
return of an asset could differ fr1om the expected return, then, the investment
involves risk. The greater the variability, the higher the risk. While actual return may
be above or below than the expected return, it should be noted that risk is usually
associated to the probability of loss or earning less than expected.
2. Risk and Return Relationship
Investment risk is related to the probability that the actual return is less than the
expected return and the greater the chance of low or negative returns, the riskier
the investment.
Generally, investors are risk averse, which means as much as possible investor
will try to avoid risk. However, it is possible to persuade the investors will be
persuaded to take the risk when they will be compensated for it.
Risk and return have direct relationship to each other. If the investment involves
lower risk, you can expect that it will also give you lower returns. On the other hand,
if the investment involves higher risk, you can expect that such investment will give
you higher returns; otherwise, you will not plunge in that particular investment.
Returns are higher for high risk investments as compared to low risk investments
and the difference is considered a risk premium to compensate the investors for
taking the risk.
3. Using Probability and Probability Distribution in Evaluating Investments
Probability and probability distribution can be used in evaluating investments by

computing the expected return. As an illustration, assume that two investment
projects are available to Mr. Martinez who has P100,000 investible funds. He is
considering the following:
e. Investment in XO Products, Inc., a manufacturer and distributor of computer

terminals and equipment for a rapidly growing data transmission industry; or
f. Investment in Tagum Electric Company which supplies an essential service.
The rates of return probability distribution for the two companies are as follows:
84
Davao del Norte
Telefax: (084) 655-9591, Local 116
XO PRODUCTS, INC.
State of the Probability Rate of Return Expected Rate

Economy of Occurrence (%) of return
(a) (b) (a x b)
Boom 0.30 100 30
Normal 0.40 15 6
Recession 0.30 (70) (21)
Expected Value of Outcome= 15%
Tagum Electric Company
State of the Probability Rate of Return Expected Rate

Economy of Occurrence (%) of return
(a) (b) (a x b)
Boom 0.30 20 6
Normal 0.40 15 6
Recession 0.30 10 3
Expected Value of Outcome= 15%
Based on the payoff matrix presented above, both companies have the same
expected return of 15%. Suppose the investor wishes to invest his money to only
one company, which of the two companies would he invest in? Perhaps, we might
suggest that Mr. Martinez can just invest to any of the two companies since both will
give the same expected return.
If we will only consider the expected value criteria, the suggestion to invest to any of
the companies may seem to be appropriate. However, if we will take a closer look
of the variability of the possible outcomes, we might offer a different proposition.
The range of probable returns for XO Products is from +100% to -70%. This means
that if the economy is in a boom state, it can give the investor earnings of as much
as 100%; however, if the economy is in recession state, investor can incur a loss in
as much as 70% of the investment. On the other hand, the probable returns for
Tagum Electric Company is from +20% to +10%. This means that if the economy is
in a boom state, it can give the investor earnings of 20%, which is far lower than
what XO Products can offer. However, the good thing about Tagum Electric
Company is that even if the economy is in recession, the investor can still earn 10%
of his investment as compared to XO Products where investor will already incur a
loss.
We can say that range of returns of XO Products is more dispersed as compared to

Tagum Electric Company. It can be recalled that risk is associated with the
variability of an investment‟s return. Hence, we can conclude that XO Products is
85
Davao del Norte
Telefax: (084) 655-9591, Local 116
riskier as compared to Tagum Electric Company because of the variability of its

returns.
Using the expected return criteria, we suggested that investor can just invest to any
of the companies since they have the same expected rate of return of 15%.
However, after evaluating the variability of the returns, we have concluded that XO
Products is riskier than Tagum Electric Company. With this, a risk averse investor
would normally decide that it would be better to invest to Tagum Electric Company
because it will give the same expected return at a lower risk.
Expected Portfolio Returns
In the previous section, the expected return computed is applicable for a stand-
alone investment. However, stock investments are usually held in a portfolio. For
example, an investor who has P100,000 investable funds decides to diversify his
investment and purchased three stocks allocated as follows:
Percentage
Amount Allocation
Jollibee Foods Corporation (JFC) P50,000 50%
Ayala Land Inc. (ALI) 25,000 25%
DITO Telecommunity Corporation (DITO) 25,000 25%
Total P100,000 100%
Assuming that the rate of return for each stock in the portfolio is as follows: JFC:
10%; ALI: 15% and DITO: 5%, the expected return of this portfolio can be
computed as follows:
Percentage Rate of Expected

Allocation Return Rate of Return
(a) (b) (a x b)
JFC 50% 10% 5.00%
ALI 25% 15% 3.75%
DITO 25% 5% 1.25%
Expected Portfolio Return 10.00%
The expected portfolio return is the weighted average of the expected returns
from the individual assets in the portfolio.
Another Illustration – Computation for Expected Portfolio Returns
Robinsons Land Corporation is evaluating two opportunities, each having the same
initial investment. The project‟s risk and return characteristics are shown below:
Project E Project F
Expected return 0.10 0.20
Proportion invested in each project 0.50 0.50
86
Davao del Norte
Telefax: (084) 655-9591, Local 116
The expected return of a portfolio combining Project E and Project F is computed

as follows:
Percentage Rate of Expected

Allocation Return Rate of Return
(a) (b) (a x b)
Project E .50 0.10 0.05
Project F .50 0.20 0.10
Expected Portfolio Return 0.15 or 15%
The expected portfolio returns can also be computed using the following formula:
n
řp=∑wiři
i=1
Where:
řp = expected portfolio return
wi= proportion of portfolio invested in asset, i
ři= expected return of asset, i
n = the number of assets in the portfolio
Substituting the formula, the expected portfolio return can be alternatively computed
as follows:
řp = (0.50) (0.10) + (0.50) (0.20) = 0.15 or 15%
Standard Deviation
In the previous sections, it was noted that the riskiness of an investment can be
gauged with the variability of its returns. While we can observe the variability of
returns by considering how scattered or narrow the range is, it would be a big help if
we can quantify the risk. In this section, we will discuss how we can quantify risk
using standard deviation.
Standard deviation, σ (pronounced as “sigma”), is a statistical measure of the

variability of a probability distribution around its expected value. It can be used as a
measure of the amount of absolute risk associated with the outcome.
Standard deviation also measures the tightness of a probability distribution. A tight

probability distribution is one in which the set of possible returns is close to the
expected value of the return. If the probability distribution is tight, then the range of
the difference between the highest and lowest value in the distribution is relatively
small. Thus, the smaller the standard deviation, the tighter the probability
distribution, the smaller the range of returns and the lower the risk.
There are two types of probability distribution: symmetrical distribution and skewed
distribution.
87
Davao del Norte
Telefax: (084) 655-9591, Local 116
Symmetrical distribution – one in which each half of the distribution is a mirror

image of the other half.
Skewed distribution – one in which half of the distribution is not a mirror image of
the other half.
It is to be noted that standard deviation is an appropriate risk measure of variability
only if the probability distribution is reasonably symmetrical. Also, when you are to
compare different investments using standard deviation, the size of the initial
investments and the expected value of their probability distributions should be
equal to make the risk comparison; otherwise, the use of standard deviation may be
misleading.
The standard deviation is calculated as follows:
3. Compute the expected value (ř).
4. Subtract the expected value from each possible return to obtain the
deviations (ri - ř).
5. Square each deviation (ri - ř)2.
6. Multiply each squared deviation by its probability of occurrence,
pi(ri - ř)2 then add. The result is called the variance (σ2), which is the
standard deviation squared.
7. Take the square root of the variance to get the standard deviation.
Where:
pi=probability of outcome
ri=return or value of outcome
n = total number of possible outcomes
Computation of Standard Deviation of XO Products, Inc.
Using in data from the previous section, the standard deviation can be computed
using the steps enumerated:
(1) The expected rate of return as previously computed is 15% (ǩ).
(2) (3) (4)

ki – ǩ (ki – ǩ)2 (ki – ǩ)2 pi
100% - 15% = 85% 7,225% (7,225%) (0.30) = 2,167.5%
15% - 15% = 0 0 (0) (0.40) = 0.0
-70% - 15% = -85% 7,225% (7,225%) (0.30) = 2,167.5%
Variance = 4,335.0%
(5) Standard deviation (σ) = 4,335% = 65.84%
Hence, XO Product‟s standard deviation is 65.84%. For this to be meaningful, try to

compute the standard deviation of Tagum Electric Company. Show your computation
in the “Let‟s Check” section of this manual.
88
Davao del Norte
Telefax: (084) 655-9591, Local 116
Calculation of Expected Portfolio Returns and Portfolio Standard Deviation
The computation for expected portfolio returns was already presented in the previous
section. In this section, computation of the standard deviation shall be discussed with
an illustration presented below:
Suppose the following projections are available for three alternative stock
investments.
State of the Probability Rate of Return if State Occurs

Economy of Occurrence Stock A Stock B
Stock C
Boom 0.40 10% 15% 20%
Recession 0.60 8% 4% 0%
Required:
4. What would be the expected return on a portfolio with equal amounts invested in
each of the three stocks (Portfolio 1)?
5. What would be the expected return if half of the portfolio were in A and the
remainder to be equally divided between B and C (Portfolio 2)?
6. Compute the standard deviation of Portfolio 1 and Portfolio 2?
7. Based on the portfolio standard deviation computation, which portfolio would
you recommend pursuing? Justify your decision.
Solution:
1. Expected Return on Portfolio 1 (wherein: A=1/3; B=1/3; C=1/3)
1.1 Compute first the portfolio expected return of each state.
a. Portfolio Expected Return (Boom)

= (1/3)(10%) + (1/3)(15%) + (1/3)(20%)
= 3.33% + 5% + 6.67%
= 15%
b. Portfolio Expected Return (Recession)

= (1/3)(8%) + (1/3)(4%) + (1/3)(0)
= 2.67% + 1.33% + 0
= 4%
1.2 Then, expected return on Portfolio 1 can be computed using the formula
given in the previous section, to wit:
n
řp=∑wiři
i=1
89
Davao del Norte
Telefax: (084) 655-9591, Local 116
Expected Return on Portfolio 1 (řp1)= (.40)(15%) + (.60)(4%)

= 6% + 2.4%
= 8.4%
2. Expected Return on Portfolio 2 (wherein: A=50%; B=25%; C=25%)
2.1 Computation of the portfolio expected return of each state.

a. Portfolio Expected Return (Boom)
= (.50)(10%) + (.25)(15%) + (.25)(20%)
= 13.75%
b. Portfolio Expected Return (Recession)

= (.50)(8%) + (.25)(4%) + (.25)(0)
= 5%
2.2 Computation of the expected return on Portfolio 2:
Expected Return on Portfolio 2 (řp2)= (.40)(13.75%) + (.60)(5%)

= 5.5% + 3%
= 8.5%
3. Portfolio Standard Deviation Computation

3.1 Standard Deviation – Portfolio 1
σ = . 40 𝑥 15% − 8.4% ² + .60 𝑥 4% − 8.4% ²

= . 40 𝑥 . 004356 + .60 𝑥 . 001936
= . 002905
= 5.4%
3.2 Standard Deviation – Portfolio 2
σ = . 40 𝑥 13.75% − 8.5% ² + .60 𝑥 5% − 8.5% ²

= . 40 𝑥 . 002756 + .60 𝑥 . 001225
= . 0018375
= 4.3%
4. Based on the portfolio standard deviation computation, it would be better to
invest to Portfolio 2 since it has a lower standard deviation which implies that this
Portfolio is less risky compared to Portfolio 1.
Coefficient of Variation
90
Davao del Norte
Telefax: (084) 655-9591, Local 116
Coefficient of variation (CV) is another useful measure of risk. It is a standardized

measure of the risk per unit of return; calculated as:
Coefficient of Variation (CV) = Standard Deviation (σ)
Expected return (ř)
The coefficient of variation of XO Products and Tagum Electric Company is

For XO Products: CV = 65.84% = 4.39

15%
For Tagum Electric Company: CV = 3.87%= .26

15%
The coefficient of variation provides a more meaningful basis for comparison when
expected returns on two or more alternatives are not the same. Based on the above
computations, XO Products is almost 17% riskier than Tagum Electric Company.
Portfolio Risk (σp)
Portfolio risk is the variability of returns of the portfolio as a whole. The riskiness of
the portfolio may be less than the riskiness of any individual assets contained in the
portfolio because of diversification.
Diversification is investing in more than one type of asset to reduce risk. It could
also be investment in several different assets of the same type, but this would be
less effective. Diversification reduces risk by combining assets such as, securities
with different risk-return characteristics.
The amount of risk reduction achieved through diversification depends on the

correlation of the individual assets‟ returns with one another. This could be measured
by computing for the correlation coefficient (ρ or rho). This is a relative statistical
measure of correlation in the degree and direction of change between two variables.
It ranges from + 1.0 to – 1.0.
Generally:
 If ρ = + 1.0, the two variables move in the same direction exactly to the same
degree and are perfectly positively correlated.
 If ρ = - 1.0, the two variables move in opposite directions exactly to the same
degree and are perfectly negatively correlated.
 If ρ = 0, the two variables are uncorrelated or independent to each other.
Risk reduction can be achieved through diversification if the returns of the assets
combined in a portfolio are not perfectly positively correlated. Hence, greater benefits
are achieved with less positive or more negative correlation among asset returns.
The following formula could be used to solve for the standard deviation of portfolio
returns for a two-asset portfolio:
91
Davao del Norte
Telefax: (084) 655-9591, Local 116
σp= w₁² σ₁² + w₂² σ₂² + 2 w₁ w₂ ρ₁, ₂ σ₁ σ₂
where:
w₁ = proportion invested in asset 1
w₂ = proportion invested in asset 2
σ₁ = standard deviation of asset 1
σ₂ = standard deviation of asset 2
ρ₁, ₂ =correlation coefficient between asset 1 and asset 2
Illustration. Assume that the investor decided to invest in a 2-asset portfolio

allocating 50% of the total investment to each asset. The information of the assets
are as follows:
Asset 1 Asset 2
Standard deviation (σ) 8% 8%
Case 1: Correlation coefficient (ρ₁, ₂) = + 1.0
σp= (0.5)² (0.08)² + (0.5)² (0.08)² + 2 0.5 0.5 1.0 0.08 (0.08)
σp= 0.0016 + 0.0016 + 0.0032
σp= 0.0064
σp= 0.08
Case 2: Correlation coefficient (ρ₁, ₂) = + 0.2
σp= (0.5)² (0.08)² + (0.5)² (0.08)² + 2 0.5 0.5 0.2 0.08 (0.08)
σp= 0.0016 + 0.0016 + 0.00064
σp= 0.00384
σp= 0.062
As observed, risk reduction occurs through diversification when the assets combined
are not perfectly positively correlated. With a low correlation of +0.2, the portfolio risk
is reduced from 0.08 to 0.062.
Risk Preferences
Investors want to be compensated for the risk associated with an investment. The
greater the risk, the more the demanded return. The actual amount of compensation
demanded is referred as the required rate of return. Such required rate of return is
influenced by the individual decision maker‟s attitude towards risk.
Decision makers may be classified into the following groups:
92
Davao del Norte
Telefax: (084) 655-9591, Local 116
 Risk averse investors – those that require higher rates of return on higher-risk
securities. The are not willing to pay an amount as much as the expected
value of an uncertain investment.
 Risk-neutral – those that are willing to pay the expected value.
 Risk-takers – those that are willing to pay more than the expected value.
Illustration for Risk Averse, Risk-Neutral and Risk Taker Decision Makers
The following data are available for Project A and Project B.
State of the Rate of Return if State Occurs

Economy Probability Project A Project B
1 Weak 0.2 P 800 P 200

2 Moderate 0.6 1,000 1,000
3 Strong 0.2 1,200 1,800
Expected value (ř) 1,000 1,000

Standard deviation (σ) 126 506
Coefficient of variation (cv) 0.13 0.51
Decisions based on attitude towards risk:
 A risk averse investor would select project A because it involves the same
expected return as Project B but has a less risk.
 A risk-neutral investor would be indifferent between the two investments.
 A risk-taker investor would prefer Project B because although the expected of

each project is equal, Project B has a greater potential return and more risk.
Hence, if the economy is strong, the maximum return for Project B is P1,800
as compared to Project A with only P1,200.
Risk and Return Portfolio
In the previous sections, risk and return analysis focus only on both a single asset
and a portfolio or collection of two or more assets. It is noteworthy to mention that
there is what we call portfolio theory. Portfolio theory involves selection of efficient
portfolios. An efficient portfolio provides the highest return for a given level of risk or
the least risk for a given level of return. While portfolio theory originated in the
context of financial assets such as investment in equity shares, the general concepts
also apply to physical assets such as the capital budgeting projects.
93
Davao del Norte
Telefax: (084) 655-9591, Local 116

Saunders, A., & Cornett, M. M. (2019). Financial markets and institutions (7thed.).
Let’s Check
Activity 1: Read and answer the problem.
You are considering purchasing two stocks. A brokerage firm has provided
estimated returns for the next year on these two stocks:
Rate of Return
State of Economy Probability Stock A Stock B
Recession 0.20 -0.15 0.20

Normal 0.50 0.20 0.30
Boom 0.30 0.60 0.40
Required:
1. Compute the expected return of each stock.

Stock A Stock B
2. Compute the standard deviation of each stock.

Stock A Stock B
94
Davao del Norte
Telefax: (084) 655-9591, Local 116
3. Compute the coefficient of variation of each stock.

Stock A Stock B
4. Which stock would you recommend if the investor wishes to take the less
risky stock? Briefly discuss the basis of your recommendation.
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
Activity 2: Read and answer the problem.
Consider the following information:
Rate of Return
State of Economy Probability Stock A Stock B Stock C
Boom 0.15 0.30 0.45 0.33

Normal 0.45 0.12 0.10 0.15
Poor 0.35 0.01 -0.15 -0.05
Recession 0.05 -0.06 -0.30 -0.09
Required:
1. Assume that your portfolio is invested 30% each in A and C, and 40% in B.
What is the expected return of the portfolio?
95
Davao del Norte
Telefax: (084) 655-9591, Local 116
2. What is the portfolio standard deviation?
Let’s Analyze
Activity 1. Read and answer the problem.
Mary Enterprises is evaluating two projects whose returns are normally distributed.
These projects have the following characteristics:
Project X Project Y
Net investment P50,000 P250,000
Expected return 100,000 500,000
Standard deviation 20,000 100,000
Coefficient of variation 0.20 0.20
1. Which project will you choose if decision is based on:
1.1 Standard deviation?
__________________________________________________________
__________________________________________________________
__________________________________________________________
1.2 Coefficient of variation?
__________________________________________________________
96
Davao del Norte
Telefax: (084) 655-9591, Local 116
__________________________________________________________
__________________________________________________________
2. Which is more appropriate risk measure in the situation – standard deviation

or coefficient of variation? Justify your answer.
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
Activity 2. Analyze and answer the problem.
You plan to form a portfolio of two stocks, Gigabyte Computers and Mega Value
Food Stores, and are considering two different options involving the weight of each
stock in your portfolio. You estimate the correlation coefficient of the returns
between Gigabyte and Mega Value to be ρ₁, ₂ = + 0.5. Other characteristics of the
two stocks are as shown below:
Gigabyte Mega Value

Computers Food Stores
Expected return (ř) 24% 8%
Standard deviation (σ) 16% 2%
Weight of each stock in the portfolio (wi)
Plan A 60% 40%
Plan B 20% 80%
1. Compute the expected portfolio return of Plan A and Plan B.
Plan A Plan B
2. Compute the portfolio standard deviation of Plan A and Plan B.
Plan A Plan B
97
Davao del Norte
Telefax: (084) 655-9591, Local 116
3. How will the results of the computation affect your investment decision?
Discuss your portfolio of choice.
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
In a Nutshell
To summarize the key concepts in this section, answer the following questions:
1. Discuss the relationship between risk and return?
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
2. The following are the statistical tools that can be used to quantify risk.
Discuss when they are applicable and how to apply them in making
investment decisions.
Statistical Tool When applicable and how to apply in investment

decisions?
Standard deviation
Coefficient of variation
98
Davao del Norte
Telefax: (084) 655-9591, Local 116
Correlation coefficient
Q&A List
1.
2.
3.
4.
5.
Keyword Index
Coefficient of variation Portfolio

Correlation coefficient Portfolio risk
Diversification Risk
Expected portfolio return Standard deviation
99
Davao del Norte
Telefax: (084) 655-9591, Local 116
Big Picture in Focus: ULOb. Apply Capital Asset Pricing Model

(CAPM) concepts in evaluating investments.
Metalanguage
enumerated below.
1. Capital Asset Pricing Model (CAPM) is a model based on the proposition that
any stocks required rate of return is equal to the risk-free rate of return plus a
risk premium that reflects only the risk remaining after diversification.
2. Diversifiable risk also called unsystematic risk or company risk, is a type of

risk can be diversified away.
3. Undiversifiable risk also called systematic or market risk, is a type of risk

cannot be eliminated by diversification.
4. Beta coefficient (or beta) is the measure of risk when assets are held in a
portfolio.
5. Risk-free rate is the rate of return that an investor would require in a riskless
investment. This is composed of the real rate and inflation premium.
6. Market rate of return is the expected rate of return of the market as a whole.
7. Market risk premium (or price per unit of risk) is the difference between the
market rate of return and the risk-free rate; computed as: (rm–rf).
8. Risk premium is the return required as compensation to investors for taking

risk; computed as: [(rm – rf)(bi)]
9. Security Market Line (SML) a graphical presentation of CAPM.
Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the 6th and 7th
100
Davao del Norte
Telefax: (084) 655-9591, Local 116
1. The previous sections focused only on the riskiness of stand-alone assets which
is generally appropriate for small businesses, many real estate investments, and
capital budgeting projects. However, the same may not be applicable for banks,
insurance companies, pension funds and other financial institutions as they are
required by law to hold diversified portfolio. It is believed that the risk of a stock
held in portfolio is typically lower than the stock‟s risk when it is held alone. Since
most investors dislike risk, they are inclined to hold portfolio to reduce risk. The
next discussion is an attempt to explain how risk should be considered when
stocks are held in a portfolio using the Capital Asset Pricing Model (CAPM).
Capital Asset Pricing Model (CAPM) is a model based on the proposition that
any stocks required rate of return is equal to the risk-free rate of return plus a risk
premium that reflects only the risk remaining after diversification. It provides a
general framework for analyzing risk-return relationships for all types of assets.
CAPM uses only one part of the total risk called the systematic risk, in evaluating
the risk-return relationship.
The total risk (previously measured by standard deviation) can be separated into
two major components:
 Diversifiable risk – also called unsystematic risk or company risk. This is

the part of the security‟s risk caused by factors unique to a particular firm.
This type of risk can be diversified away because it represents essentially
random events. Sources of diversifiable or unsystematic risk include
lawsuits, strikes, company management, marketing strategies and research
and development programs, operating and financial leverage and other
events that are unique to a particular firm. Because these events are
random, their effects on a portfolio can be eliminated by diversification.
 Undiversifiable risk – also called systematic or market risk. This is the part
of a security‟s risk caused by factors affecting the market as a whole. This
type of risk cannot be eliminated by diversification because it affects all firms
simultaneously. Some companies are sensitive than others to factors that
1affect systematic risk. Hence, systematic risk is the only relevant risk and
is affected by such factors as wars, inflation, interest rates, business cycles,
fiscal and monetary policies and therefore cannot be eliminated by
diversification.
Effect of Diversification on Systematic and Unsystematic Risk

The effect of diversification can be shown on the figure below:
101
Davao del Norte
Telefax: (084) 655-9591, Local 116
Figure 8. Effect of diversification
It can be observed that as the number of stocks held in a portfolio increases,

the diversifying effect of each additional stock on unsystematic risk
diminishes. However, one should be careful in selecting stocks to be included
in the portfolio taking into consideration their correlations with one another. If
the investor chooses stocks with correlations with one another and with low
stand-alone risk, the portfolio‟s risk will decline faster rather than if stocks will
be randomly added.
If increasing the number of stocks held in a portfolio, then is it advisable for an

investor to just hold a portfolio consisting all stocks? Probably not, because of
the following reasons:
 It entails high administrative costs and commissions would be more

than offset the income for individual investors.
 Index fund can be used for diversification and many individuals can
and do get broad diversification through these funds.
 Some people believe that they can pick stocks that will “beat the
market” so they buy them rather than the broad market.
 Some people can, through superior analysis, beat the market; so they
find and buy undervalued stocks and sell overvalued ones.
Capital Asset Pricing Model Illustrated
102
Davao del Norte
Telefax: (084) 655-9591, Local 116
The CAPM uses beta as a measure of risk. It is a model developed to help

determine a share‟s required rate of return for a given level of risk. It can be
computed as:
Required rate of return = risk-free rate + risk premium
If an investor chooses to invest his money, then he must postpone

consumption. Then at what rate of return will an investor be persuaded to
postpone consumption and invest his money instead?If the investor takes no
risk whatsoever, but merely postpones consumption, he wanted to be
compensated for the wait plus an additional return for any inflationary
pressures (an inflation premium).
If the investor demands a 3% return to postpone consumption, and another
2% to cover the expected rate of inflation, he will require 5% rate of return
which is a risk-free rate. In actual market scenario, we can consider treasury
securities as a good proxy or benchmark for a riskless asset because there is
no default risk. At this point we can say that, risk-free rate is composed of:
 real rate that excludes any inflationary expectations; and
 inflation premium that equals the expected inflationary rate.
To continue the illustration, an investor would get to move from a risk-free
asset if he will be given an additional compensation that he requires for
investing in a risky asset. The additional compensation required referred as
risk premium can be computed as follows:
Risk Premium = (Price per unit of Risk) (Beta)
The price per unit of risk is the difference between return on the market and
the risk-free rate, that is:
Price per unit of risk = Return on the Market – Risk-free Rate

Therefore, the formula to compute for the required rate of return under CAPM,
can be expressed as follows:
ri = rf+ (rm – rf) (bi)
Where:
ri= required (or expected) return on security, i
rf=expected risk-free rate of return
rm= expected return on the market portfolio
bi= beta coefficient of security, i
Illustration 1. Suppose a particular stock has a risk-free rate of 5%, a rate of return
on the market of 12% and a beta coefficient (quantity of risk) of 1.5. What would be
the investor‟s required rate of return?
103
Davao del Norte
Telefax: (084) 655-9591, Local 116
Solution: ri = rf+(rm – rf) (bi)

ri = 5% + (12% - 5%) (1.5)
ri = 5% + 10.5%
ri = 15.5%
The investor would require a risk premium of 10.5%. Thus, the required rate of
return is 15.5%.
Illustration 2.Using the same illustration, except that the beta coefficient is2.0,
what would be the required rate of return?
Solution: ri = rf+(rm – rf) (bi)
ri = 5% + (12% - 5%) (2)
ri = 5% + 14%
ri = 19%
The investor would demand for a greater rate of return because of the increase in
risk. The additional compensation (risk premium) required is 14%. Thus, the
required rate of return is 19%. As can be observed, the higher the risk, the greater
would be the required rate of return.
The Beta Coefficient Concept
The risk of a stock when it is held by itself can be measured using the standard
deviation of its expected returns. However, this is not applicable if stocks are held in
a portfolio. Hence, the systematic risk can be measured by a stock‟s beta
coefficient.
Beta is a measure of the sensitivity of a security‟s return relative to the returns of a
broad-based market portfolio securities. It measures the co-movement between a
stock and the market portfolio. The tendency of the stock to move with the market is
reflected in its beta coefficient (b), which is the measure of the stock‟s volatility
relative to an average stock.
An average-risk stock is defined as one that tends to move up and down in step
with the general market as measured by some index, such as PSE Index, Dow
Jones Industrials, the S&P 500 or the New York Stock Exchange Index.
An average stock generally has a beta (b) of 1.0 which means that is the market
moves up by 10%, the stock will also move up by 10%; on the other hand, if the
market falls by 10%, the stock will likewise fall by 10%. Hence, a portfolio of stocks
with beta of 1.0, will move up and down with the broad market averages, and it will
be just as risky as the averages.
If the beta is equal to 0.50, the stock is only half as volatile as the market – it will
riseand fall only half as much – and a portfolio of such stocks will be half as risky as
a portfolio of stocks with beta of 1.0.
104
Davao del Norte
Telefax: (084) 655-9591, Local 116
If the beta is equal to 2.0, the stock is twice as volatile as an average stock, so a
portfolio of such stocks will be twice as risky as an average portfolio. The value of
such portfolio could double – or halve – in a short time; hence, very risky.
Figure 9. Relative Volatility of Stocks A, B and C
Figure 9 presents the relative volatility of three stocks. The data below the graph
assume that in 2009 the market, defined as the portfolio consisting of all stocks,
had a total return (dividend yield plus capital gains yield) of km= 10%, and stocks A,
B and C (for High, Average and Low risk) also had returns of 10%. In 2013, the
market went up sharply, and the return on the market portfolio was k m= 20%.
Returns on the three stocks also went up: A soared to 30%; B went to 20%, the
same as the market; and C only went up to 15%. Now suppose that the market
dropped in 2014, and the market return was km= -10%. The three stocks‟ return also
fell, A plunging to -30%; B falling to -10% while C reported 0%. Thus, the three
stocks all moved in the same direction as the market, but A was by far the most
volatile; B was a volatile as the market; and C was less volatile.
If a higher-beta-than-average stock is added to an average-beta portfolio, then the
beta and consequently, the riskiness of the portfolio will increase. Conversely, if a
lower-beta-than-average stock is added to an average-risk portfolio, the portfolio‟s
beta and risk will decline.
To summarize, the market risk of a stock is measured by its beta coefficient, which
is an index of the stock‟s volatility. Some benchmark betas follow:
b = 0.5 : Stock is only half as volatile, or risky, as the average stock.
b = 1.0 : Stock is of average risk.
b = 2.0 : Stock is twice as risky as the average stock.
Portfolio Beta Coefficient
105
Davao del Norte
Telefax: (084) 655-9591, Local 116
Portfolio beta coefficient can be computed as the weighted average of the individual
securities‟ betas. The beta of the portfolio reflects how volatile the portfolio is in
relation to the market.
For example, if an investor holds P1,500,000 portfolio consisting of P500,000

invested in each of 3 stocks and each of the stock has a beta of 0.8, then the
portfolio‟s beta will be:
bp = (1/3)(0.8) + (1/3)(0.8) + (1/3)(0.8)
= .8
Since the portfolio beta is lower than 1, we can safely say that this portfolio is less
risky than the market. Hence, it should experience relatively narrow price swings
and have relatively small rate of return fluctuations.
Suppose one of the existing stocks is sold and replaced by a stock with b1 = 2, what
will happen to the portfolio beta? In this case, since, one of the stocks has
increased its beta, we can expect that the portfolio beta will also increase as
bp = (1/3)(0.8) + (1/3)(0.8) + (1/3)(2)

= 1.2
Hence, from a portfolio beta of 0.80, it increased to 1.2 as a stock with higher beta
was added in the portfolio.
Another illustration. Calculation of Portfolio Beta
An investor decided to invest his P350,000 as follows:
Amount % Allocation Beta

Diversified Stocks P200,000 57.1% 1.00
Bonds 100,000 28.6% 0.18
Treasury bills 50,000 14.3% 0.00
Total P350,000 100.0%
The beta for this portfolio can be computed as follows:

b = (0.571)(1) + (.286)(0.18) + (.143)(0)
b = .62
With a portfolio beta of .62, a market return of 11% and a risk-free rate of 5%, an
investor can expect a return of:
ri = rf+ (rm – rf) (bi)

= 5% + (11%-5%)(.62)
= 8.7%
106
Davao del Norte
Telefax: (084) 655-9591, Local 116
Security Market Line (SML)
The CAPM is expressed graphically by the security market line (SML). The security
market line represents the linear relationship between a security‟s required rate of
return and its risks as measured by beta.
Figure 10. The Security Market Line (SML)
Figure 10 shows the SML and the risk-return tradeoff of Stock 1 and Stock 2. As can
be gleaned, the risk-free rate is 8% whereas the market rate of return is 14%;
therefore, the market risk premium is 6% (14%-8%). Stock 1 with a beta coefficient
of 2 would require a high risk premium of 12%; hence, its required rate of return is
20%. On the other hand, Stock 2 with a beta coefficient of 0.5 would require a low
risk premium of 3%, hence, its required rate of return is 11%.
The required rate of return computed under CAPM can also be used as a market-
based hurdle rate for the purpose of evaluating investments. A hurdle rate is the
minimum rate of return required for a project to be accepted. Hence, if an assets‟
expected rate of return equals or exceeds the required return (falls on or above the
SML), as computed by CAPM, the asset is accepted; otherwise, it is rejected.
Illustration on Investment Decision based on SML
Based on the previous illustration, Stock 1 and Stock 2 have required rates of return
of 20% and 11%, respectively. Assume that the expected return for Stock 1 is 18%
and for Stock 2 is 15%. Should the investments be acquired based on the SML?
107
Davao del Norte
Telefax: (084) 655-9591, Local 116
Figure 11 shows that Stock 2‟s expected return of 15% is above the SML and
therefore should be acquired because it is higher than the required rate of return
(hurdle rate) of 11%. On the other hand, Stock 1 is rejected because it is expected
return is only 18% which is lower than the required rate of return of 20%. Also, based
on the graph, the expected return of Stock 1 of 18% is under the SML; hence, should
be rejected.
Figure 11. Using Security Market Line (SML) to Select Securities
Concerns About CAPM
The CAPM is based on restrictive assumptions about investor behavior and the
securities market.
 Assumptions about investor behavior include:
 Investors are risk-averse and expect to be rewarded for taking risks;
 Investors act rationally and prefer a security with the highest return for a given
level of risk, or the lowest risk for a given level of return;
 Investors make their decisions based on a single time horizon; and
 Investors share the same expectations about the risk and return
characteristics of securities.
2. Assumptions about the securities market include:

 All investors can borrow or lend in unlimited amounts at the risk-free rate;
 Financial markets are frictionless in that there are no taxes or transaction
costs;
 All assets are perfectly divisible and perfectly liquid and
108
Davao del Norte
Telefax: (084) 655-9591, Local 116
 Information is freely available to all investors.
CAPM‟s limitation lies on the fact that some of its assumptions do not all reflect
reality. There is also greater possibility that we may not be able to determine the
average return on market portfolio since they could be many possible bases and we
may not be able to determine which is most representative of the market. Another
concern is related to beta estimation because the applicability and relevance of a
company‟s beta will depend on the futureplans of the firm.
With these limitations, finance researchers have introduced other asset pricing
models which considers other risk factors to the predictive relationship of risk and
return other than the market risk. These factors such as firm size and book-to-market
ratio are used along with beta as measure of market risk.

Let’s Check
Activity 1: Classify the following events whether they can be distinguished as

systematic or unsystematic.
_________________ 1. Short-term interest rates increase unexpectedly.

_________________2.The interest rate a company pays on its short-term debt
borrowing is increased by its bank.
_________________ 3.Oil prices unexpectedly declined.
_________________ 4. An oil tanker ruptures, creating a large oil spill.
_________________ 5. A manufacturer loses a multimillion-peso product liability
suit.
_________________6. A Supreme Court decision substantially broadens producer
liability for injuries suffered by product users.
_________________7. A company suffered losses due to employees strike.
_________________ 8. Companies reported losses due to Covid-19 Pandemic.
_________________9. Inflation rate increased sharply.
_________________10. The stock price of a company declined due to reported
losses.
Activity 2:Apply CAPM concepts in answering the problems below.
109
Davao del Norte
Telefax: (084) 655-9591, Local 116
Problem 1.Assume that the risk-free rate is 8%. The expected return on the market
is 16%. If a particular stock has a beta of .7, what is the expected return based on
the CAPM?
Problem 2.The ordinaryequity share of Cebu Air, Inc. (CEB) has an estimated beta
of 1.2. The risk-free rate is 7% and the expected return on the market is 12%.
Show your computations in answering the following:
2.1. What is the market risk premium?
2.2. What is the required rate of return using CAPM?
2.3. Assume that the risk-free rate of 7% includes an inflation premium of 4%. What
would happen to the required rate of return if the inflationary expectations of
investors will increase to 6%?
Activity 3. Computation of Portfolio Beta
An investor owns an equity share portfolio invested in the following manner:

% Allocation Beta
Stock A 25% 0.84
Stock B 20% 1.17
Stock C 15% 1.11
Stock D 40% 1.36
What is the portfolio beta?
Let’s Analyze
Activity 1. Investment Evaluationusing Beta Coefficient
110
Davao del Norte
Telefax: (084) 655-9591, Local 116
Joel Securities plans to purchase equal amount of four of the following equity
shares for one of its clients. The client already holds a highly diversified portfolio.
The risk-free rate of return is estimated at 8% and the expected market return at
14%. The beta coefficients of the equity shares are as follows:
Equity Share 1 2 3 4 56
Betai 1.5 1.0 0.8 2.0 0.3 1.2
Questions:
1. What is the required rate of return of each security?
Stock 1: ______________________________________________________
Stock 2: ______________________________________________________
Stock 3: ______________________________________________________
Stock 4: ______________________________________________________
Stock 5: ______________________________________________________
Stock 6: ______________________________________________________
2. If the client wants to have the lowest risk portfolio, what four (4) equity shares
should be selected?
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
3. What is the required rate of return of the four-equity shares portfolio selected?
Assume an equal investment in each equity share.
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
Activity 2. Investment Evaluationusing Security Market Line
111
Davao del Norte
Telefax: (084) 655-9591, Local 116
The following information pertains to Stock A, B and C:
Stock A Stock B Stock C

Beta 0.5 1.0 1.2
Expected return 11% 12% 20%
Risk-free rate 5%
Expected return on market 15%
The following information is plotted in the following graph and draws a

security market line:
1. What does the SML represent?

_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
2. How can you use this graph to select securities?

_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
3. How much is the required rate of return of Stocks A, B and C?
Stock A: ______________________________________________________
Stock B: ______________________________________________________
112
Davao del Norte
Telefax: (084) 655-9591, Local 116
Stock C: ______________________________________________________
4. Which of the stocks should be selected? Explain your answer.

_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
In a Nutshell
Based on the concepts presented, answer the following questions.
1. Distinguish between systematic risk and unsystematic risk?
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
2. What the significance of Capital Asset Pricing Model (CAPM)?
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
3. What will happen to the required rate of return when beta coefficient increases?
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
113
Davao del Norte
Telefax: (084) 655-9591, Local 116
_____________________________________________________________
4. How do you make investment decisions using CAPM?
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
5. How do you make investment decisions using Security Market Line (SML)?
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
Q&A List
1.
2.
3.
4.
5.
Keyword Index
Beta coefficient (or beta) Risk-free rate

Capital Asset Pricing Model (CAPM) Risk premium
114
Davao del Norte
Telefax: (084) 655-9591, Local 116
Diversifiable risk Security Market Line (SML)

Market rate of return Undiversifiable risk
Market risk premium
Course Schedules
Activities Date Where to Submit
Big Picture (Week 1-3) ULOa: Let’s Check October 31, CF email/Quipper
Activity 2020
Big Picture (Week 1-3) ULOa: Let’s Analyze October 31, CF email/Quipper
Activity 2020
Big Picture (Week 1-3) ULOa: In a Nutshell October 31, CF email/Quipper
Activity 2020
Big Picture (Week 1-3) ULOb: Let’s Check November 5, CF email/Quipper
Activity 2020
Big Picture (Week 1-3) ULOb: Let’s Analyze November 5, CF email/Quipper
Activity 2020
Big Picture (Week 1-3) ULOb: In a Nutshell November 5, CF email/Quipper
Activity 2020
1ST EXAMINATION November 6, Quipper
2020
Big Picture (Week 4-5) ULOa: Let’s Check November 14, CF email/Quipper
Activities 2020
Big Picture (Week 4-5) ULOa: Let’s Analyze November 14, CF email/Quipper
Activity 2020
Big Picture (Week 4-5) ULOa: In a Nutshell November 14, CF email/Quipper
Activities 2020
Big Picture (Week 4-5) ULOb: Let’s Check November 19, CF email/Quipper
Activity 2020
Big Picture (Week 4-5) ULOb: Let’s Analyze November 19, CF email/Quipper
Activity 2020
Big Picture (Week 4-5) ULOb: In a Nutshell November 19, CF email/Quipper
Activities 2020
2ND EXAMINATION November 20, Quipper
2020
Big Picture (Week 6-7) ULOa: Let’s Check November 28, CF email/Quipper
Activity 2020
Big Picture (Week 6-7) ULOa: Let’s Analyze November 28, CF email/Quipper
Activities 2020
Big Picture (Week 6-7) ULOa: In a Nutshell November 28, CF email/Quipper
Activities 2020
Big Picture (Week 6-7) ULOb: Let’s Check December 3, CF email/Quipper
Activity 2020
Big Picture (Week 6-7) ULOb: Let’s Analyze December 3, CF email/Quipper
Activity 2020
Big Picture (Week 6-7) ULOb: In a Nutshell December 3, CF email/Quipper
2020
3RD EXAMINATION December 4, Quipper
2020
115
Davao del Norte
Telefax: (084) 655-9591, Local 116
Big Picture (Week 8-9) ULOa: Let’s Check December 12, CF email/Quipper
Activity 2020
Big Picture (Week 8-9) ULOa: Let’s Analyze December 12, CF email/Quipper
Activities 2020
Big Picture (Week 8-9) ULOa: In a Nutshell December 12, CF email/Quipper
Activities 2020
Big Picture (Week 8-9) ULOb: Let’s Check December 16, CF email/Quipper
Activity 2020
Big Picture (Week 8-9) ULOb: Let’s Analyze December 16, CF email/Quipper
Activity 2020
Big Picture (Week 8-9) ULOb: In a Nutshell December 16, CF email/Quipper
2020
FINALS December 17- Quipper
18, 2020
Online Code of Conduct
1) All teachers/Course Facilitators and students are expected to abide by an honor

code of conduct, and thus everyone and all are exhorted to exercise self-
management and self-regulation.
2) Faculty members are guided by utmost professional conduct as learning facilitators

in holding OBD and DED conduct. Any breach and violation shall be dealt with
properly under existing guidelines, specifically on social media conduct (OPM
21.15) and personnel discipline (OPM 21.11).
3) All students are likewise guided by professional conduct as learners in attending

OBD or DED courses. Any breach and violation shall be dealt with properly under
existing guidelines, specifically in Section 7 (Student Discipline) in the Student
Handbook.
4) Professional conduct refers to the embodiment and exercise of the University‟s

Core Values, specifically in the adherence to intellectual honesty and integrity;
academic excellence by giving due diligence in virtual class participation in all
lectures and activities, as well as fidelity in doing and submitting performance tasks
and assignments; personal discipline in complying with all deadlines; and
observance of data privacy.
5) Plagiarism is a serious intellectual crime and shall be dealt with accordingly. The
University shall institute monitoring mechanisms online to detect and penalize
plagiarism.
6) All borrowed materials uploaded by the teachers/Course Facilitators shall be

properly acknowledged and cited; the teachers/Course Facilitators shall be
professionally and personally responsible for all the materials uploaded in the
online classes or published in SIM/SDL manuals.
116
Davao del Norte
Telefax: (084) 655-9591, Local 116
7) Teachers/Course Facilitators shall devote time to handle OBD or DED courses and
shall honestly exercise due assessment of student performance.
8) Teachers/Course Facilitators shall never engage in quarrels with students online.

While contentions intellectual discussions are allowed, the teachers/Course
Facilitators shall take the higher ground in facilitating and moderating these
discussions. Foul, lewd, vulgar and discriminatory languages are absolutely
prohibited.
9) Students shall independently and honestly take examinations and do assignments,

unless collaboration is clearly required or permitted. Students shall not resort to
dishonesty to improve the result of their assessments (e.g. examinations,
assignments).
10) Students shall not allow anyone else to access their personal LMS account.
Students shall not post or share their answers, assignment or examinations to
others to further academic fraudulence online.
11) By handling OBD or DED courses, teachers/Course Facilitators agree and abide by
all the provisions of the Online Code of Conduct, as well as all the requirements
and protocols in handling online courses.
12) By enrolling in OBD or DED courses, students agree and abide by all the
provisions of the Online Code of Conduct, as well as all the requirements and
protocols in handling online courses.
Monitoring of OBD and DED
(1) The Deans, Asst. Deans, Discipline Chairs and Program Heads shall be responsible
in monitoring the conduct of their respective OBD classes through the Quipper LMS.
The LMS monitoring protocols shall be followed, i.e. monitoring of the conduct of
Teacher Activities (Views and Posts) with generated utilization graphs and data.
Individual faculty PDF utilization reports shall be generated and consolidated by
program and by college.
(2) The Academic Affairs and Academic Planning & Services shall monitor the conduct
of LMS sessions. The Academic Vice Presidents and the Deans shall collaborate to
conduct virtual CETA by randomly joining LMS classes to check and review online
the status and interaction of the faculty and the students.
(3) For DED, the Deans and Program Heads shall come up with monitoring instruments,
taking into consideration how the programs go about the conduct of DED classes.
Consolidated reports shall be submitted to Academic Affairs for endorsement to the
Chief Operating Officer.
117
Davao del Norte
Telefax: (084) 655-9591, Local 116
Course prepared by:
MARY CRIS L. LUZADA, CPA, MSA

Course Facilitator/Faculty
Course reviewed by:
LARCYNEIL P. PASCUAL, MEAL

Assistant Dean
Approved by:
GINA FE G. ISRAEL, EdD

Dean of College
118

Acc212 Sim

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Acc212 Sim

Uploaded by

Copyright:

Available Formats

UNIVERSITY OF MINDANAO

Department of Accounting Education

Physically Distanced but Academically Engaged

Self-Instructional Manual (SIM) for Self-Directed Learning (SDL)

Course/Subject: ACC 212 – Financial Markets

Name of Teacher: Mary Cris L. Luzada, CPA, MSA

THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT FOR

Part 1. Course Outline and Policies................................................................. 1

Big Picture in Focus:ULOb…………………………………………….. 14

Big Picture B: Unit Learning Outcomes ............................................... 23

Big Picture in Focus:ULOb…………………………………………….. 42

Big Picture C: Unit Learning Outcomes ............................................... 60

Big Picture in Focus:ULOb…………………………………………….. 73

Big Picture D: Unit Learning Outcomes ............................................... 83

Big Picture in Focus: ULOb…………………………………………….. 100

Part 3. Course Schedule................................................................................. 115

Course Outline: ACC 212 – Financial Markets

Course Facilitator : Mary Cris Luzada, CPA, MSA

Course Outline Policies

Areas of Concern Details

Assessment Task Submission Submission of assessment tasks shall be on the

email, FB messenger or thru any means

If the assessment task is done in real time through

Since this course is included in the licensure

Turnitin Submission To ensure honesty and authenticity, all

Please note that academic dishonesty such as

However, if the late submission of assessment

LMS, email, FB messenger or any other

Assignment Resubmission You should request in writing addressed to the

Re-marking of Assessment You should request in writing addressed to the

If disapproved by the course coordinator, you can

Grading System You shall be evaluated based on the following:

Assessment methods Weights

Submission of the final grades shall follow the

Student Communication The course coordinator shall create Group Chat in

You can also meet the course coordinator in

Contact Details of the Dean Dr. Gina Fe G.Israel

Contact Details of the Program For Accountancy:

Library Contact Details Clarissa R. Donayre, MSLS

Well Being Welfare Support Rochen D. Yntig, RGC

Alfred Joshua M. Navarro

Course Information –see/download course syllabusfromQuipper or

CC’s Voice: Hellothere! WelcometothiscourseACC 212:Financial Markets.

Big Picture in Focus: ULOa.Discuss the importance of an efficient

3. Financial Institutions / Financial Intermediaries. This refers to the banks or

4. Financial Regulators. This refers to the government agencies that supervises

5. Asymmetric Information. This refers to information that market

3. Services Provided by the Financial System.

4.1 Financial markets. This component is a system that enables participants to

Importance of Financial Institutions

Without financial institutions, there would be a direct transfer of funds from

With the presence of financial institutions in the financial system, there is

Services benefiting suppliers of funds:

1. Lower monitoring costs

Services benefiting the overall economy:

1. Money supply transmission

4.3 Financial regulators. This component is responsible for monitoring and

Savings (Indirect) Lending

Figure 1. How Financial System Works

Alimar-Mutya, R. F. (2017). Introduction to money, credit and banking.

Darškuvienė, V. (2010). Financial markets. Retrieved from

Francis, A. (2010). Financial system – meaning, functions and services. Retrieved

__________ 1.Financial markets, financial institutions and financial regulators must