Prospectives investors should know the following:

How a corporation performed in the past

By knowing how a corporation performes in the past, investors can now

predict how that corporation will move in the future. It gives them a strong clue on
how to handle it in the future. However, investors cannot predict the economy's and
market's move and how it will affect the corporations performance.

If a corporation has a good history of its earning

Interest earnings shoul be viewed carefully because at times, some of them

are bound to be wrong. If a corporation has a good history of its earnings then there
is a possibility that future earnings will be possible.

If it can minimize risk and maximize profit

Risk is viewed not only with respect ro rhe current period but also as an
increasing function of time. For example, the longer an asset is invested, the
greater is the risk.

Types of Financial Risks

1. Systematic Risk - influences a large number of assets

No one can do anything about this type of risk. The examples are economic
turmoil, problems arising in a country or a big political event that affects the
investor's trust and confidence in the country.

2. Unsystematic Risk - specific risk, affects small number of assets only

The example of this risk is when there is a sudden strike of employees in a

particular corporation.

3. Country Risk - possibility that a particular country will fail to honor itd financial
commitments

When a countrt fails to pay an obligation, it affects other financial

institutions inside the country. The other investors that should have invested in the
country will be in doubt of doing so.

4. Interest Rate Risk - the value of an instrument changes as a consequence of a

change in the interest rates

An example of this risk are the bond investments because in bonds,

interests are computed. Let us assume that interest rates became higher, so the
interests attached to a bond will also be higher.

5. Default on Credit Risk - this has a particular concern of investors who hold
bonds in their portfolio
 The corporate issuer has the highest amount of default risk and therefore it
offers higher interest rates to attract investors. The government-issued bonds have
the least default but also offer the least interest rates.

6. Foreign Exchange Risk - applicable to all financial investmentd denominated in

foreign currencies

The example of this risk is when a foreigner invests in the Philippines but the peso
depreciates, his investment will be affected because he needs more peso to convert
his money to dollars.

7. Market Risk - day to day fluctuations in the prices of stocks and options

It is also called volatility. It is referred to as the temprament of the invesent

rather tham the reason of behavior of why investors can make money on stocks.
Stocks perform well in a market of rising prices, bull market, than in a market of
falling prices, bear market. The more unstable the investment, the more chances it
will experience change.

8. Political Risk - risk from sudden changes in a country's policies because of

political reasons.

Foreign investors are not prioritized to be given the return of profits or interest
when the country is developing. Moreover, the government might take actions that
are harmful to the foreign investors.

Diversification

- occurs when different assets make up a portfolio

Portfolio is a collection of risky assets. The benefit from diversification depends

upon how the returns of various assets behave over time. By combining risky
assets, overall variability of return of risk can be reduced.

- reduces investors risk

Risk is lowered without sacrificing expected income or income is expected to

increase without having to assume more risks.