CHAPTER 6:

INTRODUCTION
TO INVESTMENT
Presented by:
KJ Marquez
(Adapted some part from the
Presentation of Mngr. Sam
Pagaduan, RFC, RFP, MBA)
 Learning Objectives:
Explain the risk-return trade-off
Compare and contrast the different types
of investments
Classify investment according to its type
and features, and advantages and
disadvantages
Measure and list ways to minimize or
reduce investment risks
 Group yourself by Triad..
You were assigned to arrange the Christmas party
of your class and you were looking for a venue
outside the school. How would you go about
searching for this location?
A. Call the number or landline number of the
venue to ask for the details of the place.
B. Visit the location two weeks before the party to
personally talk to the admin staff.
C. Search the Internet then select a venue. Go to
the venue together with your classmates on the
day of the party itself.
D. Send an email message to the admin staff
inquiring about the availability and rates
You are planning to spend the Holidays out
of town and have chosen Boracay as your
Preferred destination. How would you
purchase your airline tickets?
A. Purchase it online for P12,000 round trip with a
possibility of refund and rebooking.
B. Make a reservation and pay between for
P5,000 to P15,000 before the date of departure
C. Immediate purchase it online for P7,000 round
trip with no refund and no-rebooking clause
D. Purchase it online for P10,000 round trip with a
no-refund clause but with a possibility of re-
booking.
You were given a chance to ride only one
amusement ride at Enchanted Kingdom.
Which one will you choose?
A. Anchors Away
B. Ekstreme Tower
C. Space Shuttle
D. Wheel of Fate
 Explanation:
Each individuals choice exhibits a
different risk preference. Other
individual may be considered more
aggressive or conservative than
others.
RISK RETURN TRADE OFF
Risk Preference
3 Basic Risk Preference
Risk-Averse
Risk-Indifferent
Risk-Seeking

Risk Aversion
Individuals maximize return for a
given level of risk or minimize risk
if the return are the same
Figure 4.3 Risk Preferences
Acceptable Levels of Risk Depend
Upon the Individual Investor
Risk-indifferent
describes an investor who
does not require a change in return as
compensation for greater risk

Risk-averse describes an investor who

requires greater return in exchange for
greater risk

Risk-seekingdescribes an investor who will

accept a lower return in exchange for
greater risk
What is investment?
In finance, an investment is a
monetary asset purchased with the
idea that the asset will provide
income in the future or appreciate
and be sold at a higher price.

Source:
 INVESTMENT
According to Brown and Reilly (2014),
investment is the current commitment
of dollars for a period of time in order
to derived future payments that will
compensate the investor for:
Time the funds are committed
Expected rate of inflation during this time
period
The uncertainty of future payments
 Measuring Return
The riskier the investment, the higher is
the required rate of return by the
investor.
Required Return
The rate of return an investor must earn on
an investment to be fully compensated for
its risk
The required return is computed as follows:

Required return Real rate Expected inflation Risk premium

on investment j of return premium for investment j
 Measuring Return (contd)
Real Rate of Return
The rate of return that could be earned in
a perfect world where all outcomes are
known and certainwhere there was no
risk
Historically, this amount has remained
relatively stable at 0.5% to 2%
Expected Inflation Premium
Theaverage rate of inflation expected in
the future 4-13
 Measuring Return (contd)
Risk-free Rate
The rate of return that can be earned
on a risk-free investment
The sum of the real rate of return and
the expected inflation premium
The most common risk-free investment
is considered to be the 3-month U.S.
Treasury Bill
Real rate Expected inflation
Risk-free rate
of return premium
RF r * IP
 Measuring Return (contd)
Risk Premium
Additional return an investor requires on
an investment to compensate for higher
risks based upon issue and issuer
characteristics
Issue characteristics are the type,
maturity and features
Issuer characteristics are industry and
company factors
Sources of Risk
Risk-Return Tradeoff is the
relationship between risk and return,
in which investments with more risk
should provide higher returns, and
vice versa
Risk is the chance that the actual
return from an investment may differ
from what
is expected
 Sources of Risk (contd)
Currency Exchange Risk is the risk caused by
the varying exchange rates between the
currencies of two countries. (Discussed in
Chapter 2)
Types of Investments Affected
International stocks or ADRs
International bonds

Examples of Currency Exchange Risk

U.S.dollar gets stronger against foreign
currency, reducing value of foreign investment
Sources of Risk (contd)
BusinessRisk is the degree of uncertainty
associated with an investments earnings
and
the investments ability to pay the returns
owed to investors.
Types of Investments Affected
Common stocks
Preferred stocks

Examples of Business Risk

Decline
in company profits or market share
Bad management decisions
 Sources of Risk (contd)
FinancialRisk is the degree of uncertainty
of payment resulting from a firms mix of
debt and equity; the larger the proportion
of debt financing, the greater this risk.
Types of Investments Affected
Common stocks
Corporate bonds

Examples of Financial Risk

Company cant get additional loans for
growth or to fund operations
Company defaults on bonds
Sources of Risk (contd)
Purchasing Power Risk is the chance
that changing price levels (inflation or
deflation) will adversely affect
investment returns.
Types of Investments Affected
Bonds (fixed income)
Certificates of deposit

Examples of Purchasing Power Risk

Movie that was $8.00 last year is $9.00 this
year
Sources of Risk (contd)
InterestRate Risk is the chance that changes
in interest rates will adversely affect a
securitys value.
Types of Investments Affected
Bonds (fixed income)
Preferred stocks

Examples of Interest Rate Risk

Market values of existing bonds decrease as
market interest rates increase
Income from an investment is reinvested at a
lower interest rate than the original rate
Sources of Risk (contd)
Liquidity Risk is the risk of not being
able to liquidate an investment
conveniently and at a reasonable
price.
Types of Investments Affected
Some small company stocks
Real estate

Examples of Liquidity Risk

The price of a house has to be lowered for
a quick sale
Sources of Risk (contd)
Tax Risk is the chance that Congress will
make unfavorable changes in tax laws,
driving down the after-tax returns and
market values of certain investments.
Types of Investments Affected
Municipal bonds
Real estate

Examples of Tax Risk

Lower tax rates reduce the tax benefit of
municipal bond interest
Limits on deductions from real estate losses
Sources of Risk (contd)
Market Risk is the risk of decline in
investment returns because of market
factors independent of the given
investment.
Types of Investments Affected
All types of investments

Examples of Market Risk

Stock market decline on bad news
Political upheaval
Changes in economic conditions
Sources of Risk (contd)
EventRisk comes from an unexpected
event that has a significant and unusually
immediate effect on the underlying value
of an investment.
Types of Investments Affected
All types of investments
Examples of Event Risk
Decrease in value of insurance company stock
after
a major hurricane
Decrease in value of real estate after a major
earthquake
Measures of Risk: Single Asset
Standarddeviation is a statistic used to
measure the dispersion (variation) of returns
around an assets average or expected
return
Coefficient of variation is a statistic used to
measure the relative dispersion of an assets
returns; it is useful in comparing the risk of
assets with differing average or expected
returns
Higher values for both indicate higher risk
Table 4.11 Returns, Standard Deviations, and
Coefficients of Variation for Popular Security
Investments (19262005)
Figure 4.2 Risk-Return Tradeoffs
for Various Investment Vehicles
6 types of investment assets
Fixed Income

Shares of Stocks

Common Trust Fund or UITF

Mutual Fund

Real Estate
a. Fixed income
Coupon rate is fixed and cannot respond to inflation. It
offers fixed periodic return.
The investors are exposed to market specific risks.
it stress income and offer little or no opportunity for
appreciation in value.
TYPES:

1. Cash and Deposits- it is the safest type of investment. The disadvantage

are: it provide the lowest return and there is reinvestment risk.
2. Government Bonds- a certificate is issued showing that investor lent
money to the government. (Debenture)
3. Corporate Bonds- issued by private company showing debt and some can
be converted to shares of stocks.
4. Preferred Shares- it gives the shareholders fixed dividends and gives
priority during dissolution of the company.
5. Money market- short term deposits
DEPOSITS
Deposit instruments are provided by
financial institutions, mostly banks. The
major deposits instruments:
Savings Account
Checking Account
Time Deposit Account
ALL BANKS are monitored by the BSP.
The Deposits are insured by the Philippine
Deposit Insurance Corporation (PDIC) up
to P500,000.
CAMELS Rating System
Depositorsneed to determine the
banks overall financial position and
performance before transacting with
them.

The Video on the latter further

explained what is CAMELS Rating
system.
TOP 10 Largest Universal and
Commercial Banks in the
Philippines (As of March 2017)
B. SHARES & C. REAL ESTATES
B. SHARES OF STOCKS- can be debenture,
loan or convertible stocks. It entitles the
holder ownership and share of profit in
the form of dividend appreciation.
However, investors are exposed to risks
and it can become worthless if company
become insolvent. They have VOTING
RIGHTS.

C. REAL ESTATE- can be agricultural,

commercial or domestic. Factors
consider as investment depends on
quality of land, location, and value of
the building of the land.
D. COMMON TRUST FUND/ UITF E. MUTUAL
FUND
D. CTF & UITF of BANKS. UNIT Trust is an
authority given to trustee to hold the
pool of money. Trustees are responsible
for ensuring that fund managers adhere
to the provision of deeds and act to
protect the unit holders. Trustees are
NOT allowed to select and manages
the investment of trust,.

E. Mutual Funds- like UITF are pooled

of money but manages by
independent company.
KEY CONSIDERATION IN INVESTMENT
1. Investment Objectives (Improve financial position; For
future retirement income; Create funds to pay necessary expenses
and taxes when the person dies; for education of children).
2. Funds Available
3. Risk Tolerance- depends on age, investment objective,
financial condition and personality.
4. Investment Horizon
5. Accessibility of Funds (Time Frame, Cost or Penalty, Initial Cost)
6. Taxation Treatment
7. Performance of Investment- (is not assured or guaranteed)
8. Diversification- does not completely eliminate risk.
 Types of variable (life )funds:
FUNDS DESCRIPTION RISK POTENTIAL RETURN

CASH FUNDS Inv in cash and other forms of bank Lowest Risk Lowest Return
deposits. Amount invested is Relatively Safe
dependent on size and cash flow req
FIXED INCOME FUND Inv in BONDs and other fixed income Low Risk Low Return.
securities. Aim to generate fixed Interest Earning.
regular income.
BALANCED FUNDS Inv in fixed proportion of specified Moderate Moderate
assets.
MANAGED FUNDS Inv in MANAGED basket comprising Higher Risk Higher Return
higher portion of equity and lower compare with
proportion of Fixed Income. balanced fund
EQUITY FUNDS Inv in shares. Aims CAPITAL Highest Risk Highest Return
appreciation.
PROPERTY FUND Inv in properties and real estate. Safer than High return but
Lower Liquidity. Equity. lower liquidity.
GEOGRAPHICALLY Inv is limited to particular country or Offer exposure
SPECIALIZED UNIT region income securities (Asias Best) to different
FUNDS markets in
different region
Currency Risk
HOW MANY HERE BELIEVES THAT ECONOMY ISI
GROWING?
 2016 Performance
Private consumption, providing nearly
70% of the Philippines GDP, grew by
6.9% in 2016 over 6.3% in 2015
The Philippines's GDP growth
accelerated from 5.9% in 2015 to 6.8% in
2016
At just 4.7%, the countrys unemployment
rate last October is at its lowest since the
definition of the unemployed was
changed in 2005
The Philippines remained a strong performer
in the region, despite slow global growth.
 Improved business confidence
and rising inflows of foreign direct
investment will support private
investment.
Confidence has been reinforced
by the achievement of the
investment grade sovereign
credit.
There are improvements in
several global competitiveness
indices. For example, The
Philippines climbed four
notches in the Doing Business
Report from 103rd last year to
99th out of 190 economies in
this years edition.
 Inflation rate: Average 4.1%
GIR: $79.608B
OFW Remittances: over
USD22.8B (8%in 2014)
Low interest rates: 91-day T-
bills @ 1.346%
Accelerate Government
spending
Phil. New Tiger Economy
 Rehabilitation and
reconstruction in areas
hit by natural disasters
may have a significant
impact on the economy
in late 2014 or 2015.
Buoyant government
and election spending
for presidential race in
2016 is also expected.
 As of September 4,
2017 PSEi at 8,010.67
level.
Efficient tax
campaign having
12.2% increase.
The government
recorded a budget
surplus of P11.8B in
May 2014.
Infrastructure is vital
in the economy.
SA KABILA NG MAGANDANG EKONOMIYA, NARARAMDAMAN MO BA ITO?

Marami HINDI Nakakaramdam...

Pero kung bagsak

ang ekonomiya,
nararamdaman mo
ba?

Oo!
What you would have earned had you invested 5 years
ago?

Company March 2009 March 2014 5YR Growth Ave Annual

Stock Price Stock Price Returns

Php2,145 Php2,802 31% 6%

Php37.99 Php57.00 50% 10%

Php5.00 Php29.50 497% 99%

Php41.50 Php167.50 304% 61%

Php147.20 Php720.00 389% 78%

Php92.50 Php279.00 202% 40%

Php29.50 Php92.30 212% 42%

Source: bloomberg.com

23
Company March 2009 March 2014 Sept 2017
Stock Price Stock Price Stock Price

Php2,145 Php2,802 Php1,737.00

Php37.99 Php57.00 Php99.00
Php5.00 Php29.50 Php42.60
Php41.50 Php167.50 Php238.40
Php147.20 Php720.00 Php819.00
Php92.50 Php279.00 Php269.60
Php29.50 Php92.30 Php105.00
Php894.85 Php1,730.86 Php2,002.00
(2010)
The dream:
Ding and Dong want to send their children to a good college after 10 years.

Cost of College Education

College 5% increase per year

tuition Php 200,000 10 years later Php 325,800

Php 24,000 Annual Investment for 10 Years

Php 24,000 1.5% growth per year
Every year 10 years later Php 256,900
Placed in
Ding Time Deposit

Php 24,000 8% growth per year

Every year 10 years later Php 347,700
Placed in
Dong Investment Fund

Only Dong gets to his goal on time.

Presented by: SAMMY ISIDRO P. PAGADUAN, RFC, RFP, MBA
 FUTURE
CAREER GOAL:
Stock Trader, Investment Banker,
Corporate Finance, Financial Analysts,
Portfolio Manager, Regulatory Compliance
Quantitative Analysts, Treasury,
Personal Finance Coach

GLOBAL
NATIONAL

PERSONAL
NOW
FINANCE
Be Financial Coach for
 Younge Oldest
Births Births st Age
Generation Name
Start End Age Today*
Today*
The Lost Generation -
1890 1915 102 127
The Generation of 1914
The Interbellum Generation 1901 1913 104 116
The Greatest Generation 1910 1924 93 107
The Silent Generation 1925 1945 72 92
Baby Boomer Generation 1946 1964 53 71
Generation X (Baby Bust) 1965 1979 38 52
Xennials - 1975 1985 32 42
Generation Y - The
1980 1995 22 37
Millennials - Gen Next
Generation Z 1996 2010 7 21
Gen Alpha 2011 2025 1 6
 IKAW BA TO?
Are you one of the 70% of Gen Y members find themselves
compulsively checking their smartphones for emails, texts, or
social media updates?
Are you one of the 67% of Gen Y are confident, opinionated,
and fashionable?
Are you one of the 55% of Gen Y grew up and rely on internet
and friends as primary source of information?
Are you one of the 33% of Gen Y spending more on personal
technology gadget such as smartphones, iPad, tablets, and
alike?

Are you one of the 31% of Gen Y loves going out and travel?
Are you one of the 25% of Gen Y who spends more on
takeaway food?
Are you one of the 72% of Gen Y have buy now, pay later
mentality and leaves them little or no savings at all?
Are you one of the 85% of Gen Y who wants fun and work at
the same time?
junior
 junior
They are an advocate of financial freedom
(family, want to help other people)
They have the influence.
YOU PREPARE YOUR OWN
LUNCH