Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249
COLLEGE OF BUSINESS ADMINISTRATION
MAJOR IN FINANCIAL MANAGEMENT
1st SEMESTER, S.Y. 2021 – 2022
PRELIM COVERAGE
Module in
INVESTMENT AND PORTFOLIO MANAGEMENT
MODULE NO.: 02
NAME OF STUDENT: ___________________________________________________
YEAR / SECTION: ______________________________________________________
DATE RECEIVED: ______________________________________________________
INSTRUCTOR: ELEINE T. ALVAREZ
NOTE: Please be cautious in following the given instructions in each activity. Correspondingly, observe
punctuality in accomplishing this module. God bless and happy learning! – INSTRUCTOR
Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249
I. OVERVIEW
This module focus is to develop analytical and evaluating skills connected to context
and content risk and return fundamentals.
II. LEARNING OBJECTIVES
In this learning module, the learner is expected to:
Recognize the meaning and fundamentals of risk and return, and verbalize the
different risk preferences of financial investors
III. GUIDE QUESTIONS
1.What does risk mean?
2. How about return?
3. How does risk preferences of investors affect investment?
IV. LESSON PROPER
RISK
Refers to the uncertainty over the future to get profit or return or the
probability of getting return on securities or investments.
the extent to which the future portfolio values are likely to diverge from
the expected or predicted value.
it is also the probability of occurring something unpleasant, undesirable,
or unwelcome.
Economist’s point of view, a state when actual outcomes are low as
compared to expected outcomes
The potential loss
Characteristics of RISK
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Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249
1. Refers to chance of loss, or uncertainty of occurrence of returns.
2. The probability of adverse deviation of expected income or output.
3. Risk is always uncertain, if it is certain, that can be treated as expense
against revenue.
4. Risk is measured with the help of a statistical technique probability.
5. Risk creates both problems and opportunities for business.
Risk Preferences of Financial Investors
Three Categories to Describe How Investors Respond to Risk:
risk-averse - preference of less risky over more risky investments,
holding the rate of return fixed
risk-neutral - chooses investments based solely on their expected
returns, disregarding the risks
risk-seeking – preference of investments with higher risk and may even
sacrifice some expected return when choosing a riskier investment
RISK-AVERSE
Someone who is risk averse has the characteristic or trait of preferring
avoiding loss over making a gain. This characteristic is usually attached to
investors or market participants who prefer investments with lower returns
and relatively known risks over investments with potentially higher returns but
also with higher uncertainty and more risk. A common concept tied to risk,
one which compares the risk level of an individual investment or portfolio to
the overall risk level in the stock market, is the concept of beta.(the beta of a
company without the impact of debt. It is also known as the volatility of
returns for a company, without taking into account its financial leverage)
A risk averse investor tends to avoid relatively higher risk investments such as
stocks, options, and futures. They prefer to stick with investments with
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Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249
guaranteed returns and lower-to-no risk. These investments include, for
example, government bonds and Treasury bills. Below are two lists that
classify lower and higher risk investments. Keep in mind that while the relative
risk levels of various types of investments generally remain constant, there
can be situations where a usually low-risk investment has a higher risk or vice
versa.
SAMPLES OF INVESTMENT FOR RISK-AVERSE INVESTORS
• Bonds debt security
• Certificates of Deposit time deposit
• Treasury securities government securities
• Life Insurance death benefits paid
• Investment Grade Corporate Bonds
debt-notes issued by corporation
• Bullet Loans balloon payment
• ETFs* exchange traded funds lower risk
RISK-NEUTRAL
Risk neutral is a term that is used to describe investors who are insensitive to
risk. The investor effectively ignores the risk completely when making an
investment decision. If you present a risk neutral investor with two possible
investments that carry different levels of risk, he or she considers just the
expected return from each investment – their risks are irrelevant to him or her.
The risk neutral investor is simply not interest in risk at all, risk does not enter
his or her cognitive radar – he or she is indifferent – regardless of whether it
is high or low risk.
RISK-SEEKING
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Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249
Risk-seeking or risk-loving describes a person who cannot get enough
risk. He or she prefers an investment with an uncertain outcome rather
than one with the same expected returns and certainty that they will be
delivered.
“Attracted to risk, meaning an investment with a lower expected return
but greater risk would be preferable to a no-risk investment with a
higher expected return.”
a risk loving investor would be more likely to invest in the IPO(Initial
Public Offering) of a company with a new and exciting
product about which little is known
SAMPLES OF INVESTMENT FOR RISK-SEEKING INVESTORS
• Stocks OWNERSHIP CERTIFICATION
• Penny Stocks COMMON SHARE OF SMALL PUBLIC COMPANY
• Mutual Funds company that pools money from many investors
and invests the money in securities
• Financial Derivatives (Options, warrant, futures)
financial contract that derives its value from
an
underlying asset can be equity, forex,
commodity or any other asset
• Commodities oil, gasoline, or gold
• ETFs* EXCHANGE TRADED FUND higher risk securities
WHAT IS RETURN?
gain or loss experienced on an investment
total rate of return-the total gain or loss experienced on an investment
over a given period of time
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Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249
V. EVALUATION
MULTIPLE CHOICE: Encircle the correct answer.
1. An asset that is obtained with the intention of allowing it to appreciate in
value over time.
a. Savings
b. Investment
c. Profit
2. Funding a business is a kind of this investment.
a. Cash Equivalents
b. Ownership
c. Lending
3. Money market instruments are excellent examples of this.
a. Cash Equivalents
b. Ownership
c. Lending
4. Corporate bonds, government bonds, and even savings accounts are all
examples of this.
a. Cash Equivalents
b. Ownership
c. Lending
5. The probability of occurring something unpleasant, undesirable, or
unwelcome in the investment.
a. Risk
b. Return
c. Loss
d. Profit
6. The gain or loss experienced on an investment.
a. Risk
b. Return
c. Loss
d. Profit
7. Investors who prefer to stick with investments with guaranteed returns and
lower-to-no risk.
a. Risk-Averse
b. Risk-Neutral
c. Risk-Seeking
8. Prefers an investment with an uncertain outcome rather than one with the
same expected returns and certainty that they will be delivered.
a. Risk-Averse
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Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249
b. Risk-Neutral
c. Risk-Seeking
9. The investor effectively ignores the risk completely when making an
investment decision.
a. Risk-Averse
b. Risk-Neutral
c. Risk-Seeking
10. Investor investing in Life Insurance is an example of?
a. Risk-Averse
b. Risk-Neutral
c. Risk-Seeking
TASK
ACTIVITY 1 Restricted Essay:
In 3-5 sentences. If you would become an investor, how will you
respond to risk: will you be a risk-averse, risk-neutral or risk-
seeking kind of investor? Why?
RUBRIC
Validity of Answer 3pts
Content Structure (spelling, grammar, punctuations) 1pts
Related Examples 1pts
TOTAL: 5pts
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Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249
VI. REFERENCE/S
Risk-Averse Person - Bing images
Risk Averse Definition - Favoring Lower Returns over Lower Volatility
(corporatefinanceinstitute.com)
What is risk neutral? Definition and meaning - Market Business News
Mutual Funds | Investor.gov
COMPILED BY: CHECKED BY:
ELEINE T. ALVAREZ
BA Instructor BSBA, Coordinator
APPROVED BY:
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Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249
ROMEO M. PASCUA, Ph.D.
Vice-President of Academic Affairs
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