12 SENIOR HIGH SCHOOL

BUSINESS FINANCE
Quarter 4 – Module 2
Ways to Minimize or Reduce
Investment Risks

NegOr_Q4_Business Finance12_Module 2_v2

 Business Finance – Grade 12
Alternative Delivery Mode
Quarter 4 – Module 2: Ways to Minimize or Reduce Investment Risks
Second Edition, 2021

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NegOr_Q4_Business Finance12_Module 2_v2

 Introductory Message

This Self-Learning Module (SLM) is prepared so that you, our dear

learners, can continue your studies and learn while at home.
Activities, questions, directions, exercises, and discussions are
carefully stated for you to understand each lesson.
Each SLM is composed of different parts. Each part shall guide
you step-by-step as you discover and understand the lesson
prepared for you.
Pre-tests are provided to measure your prior knowledge on lessons
in each SLM. This will tell you if you need to proceed on completing
this module or if you need to ask your facilitator or your teacher’s
assistance for better understanding of the lesson. At the end of
each module, you need to answer the post-test to self-check your
learning. Answer keys are provided for each activity and test. We
trust that you will be honest in using these.
In addition to the material in the main text, Notes to the Teacher
are also provided to our facilitators and parents for strategies and
reminders on how they can best help you on your home-based
learning.
Please use this module with care. Do not put unnecessary marks
on any part of this SLM. Use a separate sheet of paper in answering
the exercises and tests. And read the instructions carefully before
performing each task.
If you have any questions in using this SLM or any difficulty in
answering the tasks in this module, do not hesitate to consult your
teacher or facilitator.

Thank you.

NegOr_Q4_Business Finance12_Module 2_v2

i
 I

This module was designed to provide you with fun and meaningful opportunities for
guided and independent learning at our own pace and time. You will be enabled to process the
contents of the learning resource while being an active learner.

The module is intended for you to measure and list ways to minimize or reduce
investment risks in simple case problem.

1 NegOr_Q4_Business Finance12_Module 2_v2

 I

Pre-assessment:

I. Modified True or False. Write True if the statement is true and False if false. Write
your answer in your notebook.

1. All investments involve risks.

2. Net worth is assets minus liabilities.
3. Risk capital is the money that if lost on an investment will impact thefinancial position
and lifestyle.
4. It is important to do some research about the investment instrumentsbefore finalizing the
investment plan.
5. Checking the investment’s history, earnings’ growth, management team and debt load
will provide more information about the investment portfolio.
6. Diversification of investment portfolio is one way to minimize investment risk.
7. Proper reallocation of investments depends on such factors as age,investment period
and investment temperament.
8. It is not safe to invest in an instrument which is guaranteed by thegovernment like
Treasury bonds.
9. Lower risk is usually associated with a greater probability of higher return.
10. Asset allocation is the process of spreading your assets among different types of
investments to lessen risk.
11. It is better to invest money in bank than in cooperatives.
12. Higher risks investments usually offer lower interest rates.
13. Risk takers always earns more profit.
14. It is practical to invest in real properties than buying stocks in the stock market.
15. Investment is always profitable.

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 ’s In

Investing is a process of making money grow and have a return. But in every type of
investment, each has its own level of risk and return. The higher the potential return on top of
the investment, the higher the risk or uncertainties that even the investment aside from the
promised return will not be recovered.

We have discussed different types of investments and its advantages and disadvantages
in the previous module.

Before we proceed with the next topic, let us have a review on the types of investments
through this activity.

Task1:

Direction: Write √ (check mark) if the term refers to a type of investment and X if not.
Accomplish this in your notebook.

______ 1. shares of stocks

______ 2. bonds
______ 3. mutual funds
______ 4. real estate
______ 5. investment

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 ’s New

Task 2
Case Problem:

Mister Ang is 60 years old. He just received his retirement benefits amounting to
₱ 1,000,000. He is planning to buy a small farmland so that he can have a simple life of planting
fruit bearing trees and vegetables. However, there is an offer from his friend who wanted to
borrow his money for a 10% interest per annum for 5 years.

Questions:

1. If you were the grandchild of Mr. Ang, which among the type of investment would
you suggest to him? Why?

2. Evaluate the ways and means to minimize investment risksin the chosen investment?

is It

Ways and Means to Minimize Investment Risks

Investments are typically categorized according to their corresponding risks and
returns. As a rule, the higher the return, the higher will be the risk. But that the rule is not
necessarily true in reverse order that higher risk would translate into higher potential reward.
Sometimes greater risk is just greater risk with little potential return. Risk isn’t a bad thing. But
there is a need to understand what kind of risks the investment can take and how to reduce
unacceptable levels of risk.

1. Determination of tolerance to different kinds of risks

Every investment involves some level of risks. Understanding the type of risk, or the
combination of types of risk, is essential in reducing those risks. Two factors that can help
determine the risk tolerance:
a. Net worth - is assets minus capital
b. Risk capital - is money that, if lost on an investment, won’t impact the financial
position and lifestyle.

If there is a high net worth and substantial risk capital, the risk tolerance if higher.

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But if the net worth is modest or nothing, and the risk capital is not much, it’s probable to
be better off with conservative, low-risk investment.

2. Conducting due diligence

This means making research about the investment instruments before finalizing the
investment plan. Checking out the investment’s history, earnings’ growth, management
team and debt load will provide more information about the investment portfolio. This
information can be compared with other similar investment products as well as to other
assets in the investment portfolio.

The data about the stock’s price- to- earnings ratio or P/E ratio will measure the
relationship between a company’s stock price and its annual after-tax earnings. A company
with a significantly higher P/E ratio than other comparable companies in the same industry
typically involves a higher risk. Investment risk can be minimized by weeding out stocks
with high P/E ratios, unstable management and inconsistent earnings and sales growth.

3. Diversification of investment portfolio

Diversification of investment portfolio is the risk management strategy of combining

a variety of assets to reduce the overall risk of an investment portfolio. One of its purposes
is portfolio risk management.

Diversification of investment portfolio also lowers its volatility as movements or

changes are not expected to happen at the same time in all asset categories, industries, or
stocks. The decrease in the instability of the portfolio considers that the different assets
market price can rise and fall at different time intervals. This results to a well balance risk
and return or risk is spread over a variety of products. For example, investment money can
be made as follows:

A. 25% into ABC stock

B. 25% into time certificate of deposit
C. 25% into Treasury bonds; and
D. 25% into real estate.

Profit is realized when there will be an increase in the market price of stock of ABC
company. But this profit potential is reduced by the fact that only a portion of the money is
invested in the said stock.

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 However, if ABC Company fails, the loss is also limited, because 75% of the
money is invested in other products.

4. Monitoring of investments

Regular reallocation of resources is necessary for control purposes. Proper

allocation of the investments depends on such factors as age, investment period and
investment temperament.

For example, it is necessary to evaluate holdings at least once a year for an

investment portfolio consisting of 40% in intermediate-term bonds, 25% in large capital
stocks, 10% in short-term bonds, 10% in medium capital stocks, 10% in small capital stocks
and 5% in international stocks. This is to assess whether there is a need to buy or sell assets
to bring the portfolio back to proper asset allocation.

5. Taking advantage of government guaranteed investment products

It is very safe to invest in an instrument which is guaranteed by the government

like Treasury bonds. These securities are fully backed by the Philippine government aside
from an insurance from the Philippine Deposit Insurance Corporation. In addition, holding
investment until its maturity is better than early withdrawal considering the market risks
and penalties except for a secured recovery of principal and interest.

Categories of investment risk and its example:

1. Systematic Risk

Systematic risk is associated with the market. This risk affects the overall market
of the security. It is unpredictable and undiversifiable. However, the risk can be mitigated
through hedging.

For example, political upheaval is a systematic risk that can affect multiple
financial markets, such as the bond, stock, and currency markets. An investor can hedge
against this sort of risk by buying put options in the market itself.

2. Unsystematic Risk

The second category of risk, unsystematic risk, is associated with a company or

sector. It is also known as diversifiable risk and can be mitigated through asset
diversification. This risk is only inherent to a specific stock or industry. If an investor buys
an oil stock, he assumes the risk associated with both the oil industry and the company
itself.

For example, suppose an investor has invested in an oil company, and he believes
the falling price of oil affects the company. The investor may look to take the opposite
side of, or hedge, his position by buying a put option on crude oil or on the company, or

6 NegOr_Q4_Business Finance12_Module 2_v2

 he may look to mitigate the risk through diversification by buying stock in retail or airline
companies. He mitigates some of the risk if he takes these routes to protect his exposure
to the oil industry. If he is not concerned with risk management, the company's stock and
oil price could drop significantly, and he could lose his entire investment, severely
impacting his portfolio.

’s More

Task 3
Direction: Fill in the missing words in the paragraph. Write your answers in your notebook.

1.______________are typically categorized according to their corresponding risks and

returns. As a rule, the higher the return, the 2.____________ will be the risk. But that the rule
is not necessarily true in reverse order that higher risk would translate into higher potential
3.____________ Sometimes greater risk is just greater risk with little potential
4.______________. Risk isn’t a bad thing. But there is a need to understand what kind of risks
the investment can take and how to reduce unacceptable levels of risk.

There are ways and means to minimize investment risks:

5.____________, 6.____________ _,7._____________,8.____________,9.____________

There are two factors that can help in determining the risk tolerance, these are:10.
____ and 11._ . We also have two categories of risk. These are the12. and 13.
. The risk which is associated with the market is called_ ___while 15._ _is
also known as diversifiable risk and can bemitigated through asset diversification.

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 I Can Do

TASK 4

Direction. Evaluate the case problem below and answer the questions given. Your answers are
graded according to the rubric. Accomplish this in your notebook.

Case Problem:

Jennifer decided to buy ₱ 1,000 worth of stock in a company that makes very popular
products. She believed that the company would grow and be profitable for the next several
years. Several months later, she found out that the company lost a major case in court and will
no longer be able to sell its most popular product. Jennifer decided to sell all her stocks. When
she called her stockbroker, she found out that her shares were worth ₱400.

Questions:

1. How would you describe the financial risk that Jennifer faces?
2. What are the ways you can recommend in reducing the risk that Jennifer is facing?

Rubric for Scoring

(Highest Possible = 20 points)
➢ Response to the problem is well organized and clearly written;
careful planning before writing is evident.
20 points
➢ With at least 5 sentences of interesting contents and words are
correctly spelled
➢ Does not address the problem clearly.
➢ Some interesting content points not sustained or not fully
10 points developed.
➢ Answers must have at least 5 sentences
➢ Gives the impression of writing just to complete the
5 points
assignment.

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 I Have Learned

Reflection
Complete the following statements. Write your statements in your activity notebook/ answer
sheet.

1. As a student, I have learned …______________________________________.

2. As a student, I have realized the importance of this lesson

…______________________________________.

3. Using the knowledge, I have learned in this lesson, I will be able to...

_____________________________________________________________.

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I. True or False
Direction: Write TRUE if the statement is correct and your FALSE if otherwise.

1. Investments are typically categorized according to their corresponding risks and

returns.
2. Systematic risk is associated with a company or sector.
3. It is very safe to invest in an instrument which is guaranteed by the non-government
organizations.
4. In an investment, the higher the return, the higher will be the risk.
5. Sometimes lesser risk is just greater risk with little potential return.
6. Every investment involves some level of risks.

II. Modified Identification.

Direction: Choose among the following. Write the letter of the correct
answer in your notebook.

A. Factors in determining the risk

B. Ways and means to minimize investment risk
C. Categories of investment

1. Unsystematic Risk
2. Taking advantage of government guaranteed investment products
3. Systematic Risk
4. Risk capital
5. Net worth
6. Monitoring of investments
7. Diversification of investment portfolio
8. Determination of tolerance to different kind of risks
9. Conducting due diligence

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NegOr_Q4_Business Finance12_Module 2_v2 11
True True
True True
True False
True True
1. √ 13. True
2. √ 14. False
3. √ 15. False
4. √
5. √
WHAT’S MORE
TASK 3
Higher
Reward
Return
Conducting due diligence
Systematic
Unsystematic
Systematic
Unsystematic
WHATS I HAVE LEARNED
ASSESSMENT WHAT CAN I DO
Test I.
1. TRUE Answer may vary
2. FALSE
3. FALSE
4. TRUE
5. TRUE
6. TRUE
Test II
1. C
2. B
3. C
4. A
5. A
6. B
7. B
8. B
9. B
Answer Key
 References

Book

De Guzman, A.A. (2019). Business Finance (for Senior High School). LORIMAR
Publishing Inc.: 10-B Boston St., Brgy Kaunlaran, Cubao, Quezon City, Metro Manila

Online Sources

Segal, T. (2020). Common Methods of Measurement for Investment Risk

Management. Retrieved form:
https://www.investopedia.com/ask/answers/041415/what-are-some-common-
measures-risk-used-risk-management.asp. [Accessed: March 18, 2021]

Save and Invest: The Rise and Fall of Risk and Return. Accessed: March 23, 2021
https://tinyurl.com/4x9d8pfj

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