2. 2 “Copyright and Terms of Service Copyright © Texas Education Agency. The materials found on this website are copyrighted © and trademarked ™ as the property of the Texas Education Agency and may not be reproduced without the express written permission of the Texas Education Agency, except under the following conditions: 1)Texas public school districts, charter schools, and Education Service Centers may reproduce and use copies of the Materials and Related Materials for the districts’ and schools’ educational use without obtaining permission from the Texas Education Agency; 2) Residents of the state of Texas may reproduce and use copies of the Materials and Related Materials for individual personal use only without obtaining written permission of the Texas Education Agency; 3) Any portion reproduced must be reproduced in its entirety and remain unedited, unaltered and unchanged in any way; 4) No monetary charge can be made for the reproduced materials or any document containing them; however, a reasonable charge to cover only the cost of reproduction and distribution may be charged. Private entities or persons located in Texas that are not Texas public school districts or Texas charter schools or any entity, whether public or private, educational or non-educational, located outside the state of Texas MUST obtain written approval from the Texas Education Agency and will be required to enter into a license agreement that may involve the payment of a licensing fee or a royalty fee. Call TEA Copyrights with any questions you have. Copyright © Texas Education Agency, 2013. All rights reserved.

3. What is Risk? How is it measured? How do I avoid it? The possibility of the loss of an investment Dollars or percentage No guarantees, but diversification can reduce it 3 Copyright © Texas Education Agency, 2013. All rights reserved.

4.  Example: › Investing $100 in a savings account earning 2% annual interest  $100 x.02= $2 so now you have $102  Example: › Investing $100 in a stock and the value increases your money to $120  $120 - $100 = $20 Your return is $20 or $20/$100 = a 20% return 4 Copyright © Texas Education Agency, 2013. All rights reserved.

5.  Direct relationship  As risk increases, return increases  The lower the risk, the lower the return 5 Risk Return Copyright © Texas Education Agency, 2013. All rights reserved.

6. Risk Averse- avoid risk if possible Neutral-just want a high return without considering risk Risk Seeking- look for risky investments 6 Copyright © Texas Education Agency, 2013. All rights reserved.

7. Stage 1: single, early wage earner, more risk seeking, 20s Stage 2: possibly married, higher wage potential, somewhat risk-seeking, 30s Stage 3: married with children, college to save for, not as risky, 40s Stage 4: children grown, approaching retirement, more risk averse, 50s Stage 5: less income, retirement, much more risk averse, 60s+ 7 Copyright © Texas Education Agency, 2013. All rights reserved.

8. RiskSignificance LiquidityRisk that the investment may not be able to be converted to cash when needed MarketRisk that affects the market as a whole; affects mutual funds more than individual stocks BusinessRisk of a company going out of business; affects stocks and corporate bonds InflationRisk that the inflation rate will be higher than your rate of return Interest RateRisk that the interest rate will increase and your fixed-interest investments will be worth less Exchange RateRisk that currency values can decrease causing foreign investments to be worth less PoliticalRisk that government events or actions can affect the value of your investments 8 Copyright © Texas Education Agency, 2013. All rights reserved.

9.  Investing in several types of securities as opposed to only a single investment  Also called asset allocation  Theory that a pooling of assets can be safer than only one asset  An example - investing in a mutual fund as opposed to a single company’s stock 9 Copyright © Texas Education Agency, 2013. All rights reserved.

10.  Equities › Stocks › Mutual funds  Fixed Income Securities › Government bonds › Corporate bonds  Cash Equivalents › Bank accounts › Money market accounts › Certificates of Deposit  Real Estate 10 Copyright © Texas Education Agency, 2013. All rights reserved.

11. Futures, Penny Stocks Government Bonds Corporate Bonds, Large Cap Stocks Checking and Savings Accounts 11 More Risky Less Risky Copyright © Texas Education Agency, 2013. All rights reserved.

12. U.S. Savings Bonds Checking/Savings Accounts Certificates of Deposit Money Market Accounts Mutual Funds High credit-rating corporate bonds 12 Copyright © Texas Education Agency, 2013. All rights reserved.

13. Preferred Stock High Quality Stocks Large- cap Stocks Growth Stocks 13 Copyright © Texas Education Agency, 2013. All rights reserved.

14. Small- and Mid- cap Stocks Mutual Funds in same industry Futures, commodities, collectibles Penny Stocks 14 Copyright © Texas Education Agency, 2013. All rights reserved.

15.  Risk/Return Line Graph Assignment #1 – Following the example of the risk pyramid you learned about in this lesson, create a line graph showing the direct risk/return relationship between at least five different investments. Axes should be labeled.  Your Own Portfolio Assignment #2 – Students will put together their own portfolio using the different types of investments discussed in this lesson. Virtually invest $5,000 for a six-month period and include at least three different investments according to their own level of risk tolerance. For example, if you want safe investments, you can calculate the return using savings account rates, certificate of deposit rates, and money market accounts. Specify how much of the $5,000 will go into which investments and determine how much money you will have at the end of six months. You may display your results in any manner you choose, but it should look professional. 15 Copyright © Texas Education Agency, 2013. All rights reserved.

16.  Financial Trivia Risk Tolerance Assignment #3 – Review the attached handout for the Financial Trivia. According to the directions, write in pen, not pencil, and answer trivia questions. As each question is asked, indicate whether or not you will go ‘double or nothing’(if you are very sure of the answer) on your answer, meaning you can get zero, five, or ten points for each question. Each question is worth five points. If the answer is incorrect, it is zero points. If you went ‘double or nothing’ and you are right, it is ten points. If it was incorrect, you get zero points. After the ten questions are completed, tally your scores and write a conclusion regarding your risk tolerance level and if it paid off or not. 16 Copyright © Texas Education Agency, 2013. All rights reserved.