Risk

BUSINESS FINANCE
GLENDA G. ARRADAZA
OBJECTIVES:
Measure and List Ways to Minimize or
Reduce Investment Risks in Simple Case
Problems (ABM_BF12-IVm-n-25)
a. Identify the ways and means to minimize

investment risks;
b. Apply ways on how to reduce investment risks in
simple case problems.
RISK
✓ the degree of uncertainty and/or
potential financial loss inherent in an
investment decision
✓ Refers to the dispersion of a variable
✓ It is measured by variance or SD
✓ Variance is the sum of the squares of
the deviations of actual returns from
average returns
Measure and List Ways to Minimize or Reduce Investment Risks in Simple Case
Categories of investment
risk and its example:
✓ Systematic Risk
✓ Unsystematic Risk
Systematic RISK
✓ Known as market risk or non-
diversifiable risk.
✓ refers to the risk inherent in the
entire market or a particular asset
class and cannot be eliminated
through diversification.
✓ Economic and political instability,
economic recession, macro policy
of the government that affects of
all shares systematically.
Systematic RISK EXAMPLE
✓ Risk due to inflation, political risk,
market risk, natural calamities,
scams, risk due to government
policies, monsoon.
example
•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.
Unsystematic Risk
✓ is associated with a company or
sector.
✓ It is also known as diversifiable
risk and can be mitigated through
asset diversification.
Unsystematic Risk
✓ Raw materials scarcity, labor
strike, management efficiency.
✓ Business risk, financial risk, risk
due uncertainty and disputes
•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.
Ways and Means to
Minimize Investment Risks
Risk management is the
process of identification,
analysis, and acceptance or
mitigation of uncertainty in
investment decisions.
Ways and Means to
1. Determination of tolerance to different
kinds of risks
Every investment involves some level of risk.
Understanding the type of risk, or the
combination of types of risk, is essential in
reducing those risks.
Ways and Means to
2. Conducting due diligence
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.
Ways and Means to
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.
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.
Ways and Means to
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.
Ways and Means to
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 insurance from the Philippine Deposit
Insurance Corporation.
Evaluate the case
problem below and
answer the questions
given. ?
Problems (ABM_BF12-IVm-n-25
•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.

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BUSINESS FINANCE

a. Identify the ways and means to minimize

•For example, political upheaval is a

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