BUSFIN1

(Business Finance)

4th QUARTER
(Second Sem, SY 2020-2021)
Be reminded of our class
preliminaries!
VIRTUAL CLASSROOM RULES/REMINDERS!!!
CHAPTER 4.
Basic Long-Term Financial
Concepts
LESSON. Risk-Return Trade-Off
OBJECTIVE:
At the end of the lesson, you should be able to:
 explain the concept of risk-return trade-off
What is a risk?
 What kind of a
risk-taker are you?
Instruction:
1. Get a small piece of paper and a pen.
2. Write down the letter of your answer
based on the statement that best describes
you.
1. You are driving to meet some friends.
You’re running late. The traffic light ahead
turns yellow. You:
a. always stop at yellow no matter what.
b. break and stop at the light. You’re late
anyway, right?
c. beat the light.
2. Your friend gives you a tip. She heard this
stock is going to go through the roof in the next
week. You:
a. hear this stuff all the time, know it’s not
true and ignore her.
b. nod, squint your eyes, log into E*Trade
and invest a few.
c. take all that money you had for a rainy day
and invest.
3. You are a really cool partygoer. Your bf/gf is with
you. You see this seriously cute hottie across the
room. You:
a. look at your boy/girl, order yourself another
drink and continue on with your conversation.
b. envision a plan where if the stars aligned and
you were both at the bar at the same time you
would definitely have something to talk about.
c. immediately excuse yourself and head across
the room.
4. You’re with a friend in a carnival. You walk into
this interesting tent. In the center is a cobra in a cage.
People are queued up to pay a hundred for a chance to
grab the five-hundred bill on top of the snake's cage.
You:
a. leave.
b. stick around to see the free show.
c. exclaim, “Heck, I’ve got a hundred!” and get in
line
5. You’re sitting next to this old man on a jeepney. It’s
obvious he hasn’t showered and smelling alcohol while he
naps through the trip. When he wakes up he starts talking to
you, explaining how he can help your business. You:
a. thank him politely and inside your head you can’t
wait to get off.
b. give him your business card and ask for his, knowing
full well this guy is full of crap.
c. you try to find a polite way to tell him his body odor
offends.
6. It’s the dreaded annual company Christmas party. The
CEO is a little inebriated and asks if anyone else would like
to get up to attest to the company’s good fortune. You:
a. put your head down in shame.
b. chuckle with most of the crowd.
c. realize this is your time to shine and head up to the
front
7. You’ve spent time researching the perfect part of town to
buy a property. You think you have all your bases covered,
but investing in this property will definitely put you and
your family out there. You:
a. decide it’s better to wait until you have more of a
cushion.
b. buy the property and hope for the best.
c. are so convinced the deal is so good, you buy two.
8. Today is your birthday and you are on a trip with friends
to celebrate. Everyone has been drinking and the gang
decides it’s the perfect time to rent gears from the resort and
go bungee jumping. You:
a. tell your friends you’ll greet them when they get
back.
b. go ask around for a car to hire and recommendations
on the best places to drink in town.
c. you are the first one tethered to the cord.
SCORING:
For every answer of A, give it 1 point.
For B, give it 2 points.
For C, given it 3 points.
What kind of risk-taker are you? If you
scored from
8-10 – Death warmed over.
11-13 – Nervous Nelly.
14-16 – Risk Master General.
17-19 – You’re the Pusher.
20+ - You have serious issues & you should seek
professional help!
Investment Risks
 are uncertainties or chances that the
outcomes of investments are different from
what is expected or projected.
Risk-Return Trade Off
Investment Risks & Returns
Risk-Return Trade Off
Risk-Return Trade Off
“An investment will yield a higher return only if
the investor accepts a higher risk or possibility of
losses (Chen, 2020).”
Risk Tolerance
a. Conservative Risk Tolerance
 is a characteristic of an investor whose willingness
in accepting risks is very low. This investor will
expect to gain profit, with little to no disadvantage
to them.
b. Moderate Risk Tolerance
 is a characteristic of an investor who is willing to put average
resources and accept some risks.
 this investor will expect to gain above average profit, while
enduring little disadvantages.
 this type of investor is more likely to pull-out an investment (if
applicable) whenever risks are uncontrollable
c. Aggressive Risk Tolerance
 is a characteristic of an investor who is willing to put more
resources and accept maximum risks on high-quality
investment with high expectation of return.
 this investor has great knowledge about the industry and is
willing to keep the investment at a longer holding period until
investments create the highest possible return but is prepared for
the worst - losing the entire investment.
2 Fundamental Types of Risk

Systematic Risk

Unsystematic Risk
SYSTEMATIC RISK
Uncertainty inherent to the entire market.

This type of risk has effects that are wider

in scope.
Example: SYSTEMATIC RISK
UNSYSTEMATIC RISK
Uncertainty that comes with the company
or industry.

Also referred to as SPECIFIC RISK.

This type of risk affects a particular

company/industry; only a small number of
assets
Example: UNSYSTEMATIC RISK
SPECIFIC TYPES OF RISK
Interest Countr Foreign
Credit Political Market
Rate y Exchange

Political Risk
TYPES OF RISKS
Interest Countr Foreign
Credit Political Market
Rate y Exchange

Credit/Default Risk
SPECIFIC TYPES OF RISK
Interest Countr Foreign
Credit Political Market
Rate y Exchange

Interest Rate Risk

SPECIFIC TYPES OF RISK
Interest Countr Foreign
Credit Political Market
Rate y Exchange

Country Risk
SPECIFIC TYPES OF RISK
Interest Countr Foreign
Credit Political Market
Rate y Exchange

Market Risk
SPECIFIC TYPES OF RISK
Interest Countr Foreign
Credit Political Market
Rate y Exchange

Foreign Exchange Risk

DIVERSIFICATION
 A risk management technique wherein an investor
includes a variety of assets or investments products in
his or her portfolio.

Bank savings Mutual funds

Stocks/bonds
accounts accounts
“Don’t put all your eggs in one
basket.”
Activity: