LEVEL: Intermediate

LENGTH: 45 minutes

Risk and Diversity

Lesson Overview
In this lesson, students will focus more closely INSIDE THE COMPETITION
Student teams must consider
on risk and return and the importance of the risk profile of their client to
diversifying their portfolios. In particular, build an effective investment
strategy! And, ideally, they want
students will play a token game to better an effective strategy that will
generate returns to build his
understand why investors diversify. or her wealth. Also, portfolio
diversification is key to the
investment competition, which
Background Knowledge for Teachers is why teams are required to
invest in at least as many sectors
Return is defined as the money gained or lost on an invest- as they have members. They
ment over a period of time. Generally speaking, we can de- should understand why
fine risk as the uncertainty about return and the potential for diversification is essential, even
loss. Thus, investing comes with the risk of getting negative when investing in only stocks.
returns. Investment returns are typically positively correlated
with risk. Investments with higher expected payoffs tend to
also be the investments where there is less certainty about MATERIALS
the actual outcome, which means higher risk. This is why we Provided
1. Student Worksheet (page 5)
need to diversify our investments to spread the risk, wheth- 2. Kahoot Game
er in different investment products, or securities in various 3. Why Investors Diversify
sectors and industries. article (page 6)
Not Provided
Learning Objectives White board, sharpies, two
dice, tokens (you can use coins,
At the end of this lesson, students will be able to: buttons, paper strips, binder
clips, etc.)
■ Articulate the correlation between risk and return
■ Distinguish high-risk investments from low-risk
investments STUDENT VOICES
All this talk about the college
■ Understand distribution of historical outcomes investment opens the door
■ Recognize the importance of diversification to a broader discussion about
the decisions we make for our
future. Assign the article Would
Glossary Terms You Bypass College
for Real-world Learning? to
Watch how Wharton faculty define and use the glossary provide a different perspective
on post-high school education.
terms presented in this lesson: Have students debate the
■ Industry different paths in groups, and
use the story comment thread to
■ Company consider other student voices.
■ Return On Investment

©2020 The Wharton School, The University of Pennsylvania

 Risk and
Diversity 2
Lesson Plan
SEQUENCE/TIME DETAILS

RETURN AND RISK

Ask 5-6 students to each name one type of investment that we discussed in the previous
Engage lessons. For example, college, real estate, stocks, bonds, gold. Then, encourage students
/5 mins to explain the risk and return for each type of investment. For example, the risk of in-
vesting in a college degree is that you might not be able to graduate or get a job that pays
for the expensive tuition, but the return is the potential to get a higher-paying job than
you could land without a college degree. Another example: the return on investing in
real estate like an apartment building lies in the rent collected from tenants, but the risk
of investing in a rental apartment rises so much during the COVID-19 pandemic, as it
might be hard to find new tenants or the current tenants aren’t able to pay their rent.
Next, ask 2 students to each try to define the term “risk” and “return”.
Return, in the financial world, is often defined as the money gained or lost on an invest-
ment over a period of time. Return can be positive or negative. Generally speaking, we
can define risk as the uncertainty about return and the potential for loss. Investors are
uncertain what’s going to happen in the future, but it doesn’t mean they are clueless.
What are some strategies that investors use to measure risk? What are some methods
for you to make educated guesses on how much profit or loss you are going to get in the
future? Let’s explore one possible way next.

WATCH TWO SHORT VIDEOS ON DISTRIBUTION OF HISTORICAL OUTCOMES

Distribution of historical outcomes refers, in general, to an investment’s history of re-
turns. First, let’s watch how Wharton finance professor Krista Schwarz used an example
Guided of predicting the color that a friend would wear to a party, to explain how investors can
Watching use historical information to predict future performance. Video 1 (Link) (2:56)
/10 mins
After the video, ask students: is prediction based on historical returns equal to outcome?
Next, let’s continue to explore distribution of outcomes. Video 2 (Link) (3:07)
We know investing is risky. How do we mitigate that risk and try to maximize our invest-
ment returns? The old saying goes, “Don’t put all your eggs into one basket.” The same
principle applies to investing. Spread your investment around—in other words, diversify.
Next, we are going to play a token game to help students understand the importance of
diversification.

TOKEN GAME
1. Give each student ten tokens. Next, put four different “investments” on the chalk-
board or dry-erase board.
Activity
a. Investment 1: You will win one token each time the total of the dice adds up to
/15 mins an even number. You will lose one token if the dice add up to an odd number.
b. Investment 2: You will win ten tokens each time the dice land on two of the
same number. You will lose a token if the dice do not both land on the same
number.

CONTINUED >
©2020 The Wharton School, The University of Pennsylvania
 Risk and
Diversity 3
c. Investment 3: You will win two tokens each time both die land on the number
1. You will lose a token if the dice land in any other combination.
d. Investment 4: You will win thirty tokens each time the dice lands on double
Activity sixes. You will lose a token if the dice land in any other combination.
/15 mins 2. Throughout this game, students can use tokens to buy different investments. Each
round, they can only spend one token on each investment but they can invest in mul-
tiple investments. After students buy their investments, the teacher will roll the dice.
Based on the outcome of the dice, students will earn different returns (or losses) on
their investments. They can use the Student Worksheet (Page 4) to track their return.
3. After playing the game for 5-10 rounds, ask students to calculate their final return.
Ask students to raise their hand if:
a. They think they made the most tokens.
b. They lost all of their tokens.
4. Give students 5 minutes to discuss with their neighbor on their investment strategy
and think about which of the four investments have the most risk.
5. Whole class discussion
a. Would you make a risky investment if the reward was low? Why or why not?
b. Did anyone invest in Investment 3 (high risk, low reward)?
c. Is it wrong to invest in a risky investment? Why or why not?
d. For those who received high returns, what was your investment strategy? Did
you make different investments each time to spread your risk? Or did you stick
with one type of investment?
The purpose of this game is to let students experience different investment styles,
whether to put all of your money in one investment or spread money into different in-
vestments. However, this game does not represent the real stock market because rolling
dice is completely random. There is no way to predict what numbers appear on the dice
by doing research and analysis. Even though the stock market is notoriously unpredict-
able, you can use some analysis methods we are going to learn in the next lessons to
inform your predictions.

WHY INVESTORS DIVERSIFY: SPREADING YOUR WEALTH ACROSS ASSETS, INDUSTRIES

AND COUNTRIES (SEE PAGE 6 FOR THE PDF VERSION OF THIS ARTICLE)
Guided Give students five minutes to read this article and consider the following questions while
Reading reading:
/10 mins a. What does it mean to diversify your investments?
b. What does it mean to diversify your investments in the stock market?
c. Why is it important to diversify by sector and industry if you are investing in
stocks?
d. Why might it make sense to invest in assets related to an emerging economy like
China or Brazil?
e. If you like Nike, would you consider other companies in the Apparel & Textile
industry or Consumer Discretionary sector?

KAHOOT GAME
Click here to access the game.
Assess
/5 mins

©2020 The Wharton School, The University of Pennsylvania

 Risk and
Diversity 4
1. Investment returns are typically positively correlated with risk.
2. Investors use historical distribution of outcomes to predict investment returns, but
prediction does not always equal outcome.
Takeaways 3. Diversifying investment mitigates risk.

Extend
Activity: Have students competing in the investment competition explore the approved stock list and
discuss:
a. How many sectors are there and what are they? What does each sector mean? Which industries fall
under each sector?
b. Can you identify stocks from other countries?
c. Did you notice different stock styles?
In short, the approved stock list in this competition uses the Morningstar Style Box (Link) to characterize
selected stocks. It is a helpful tool for investors to gauge risks and evaluate their portfolio diversification.
There are nine different styles:

Value Core Growth

Large
Mid
Small

©2020 The Wharton School, The University of Pennsylvania

 Risk and
Diversity 5
Student Worksheet
TOKEN GAME
Round Investment Return
1

10

©2020 The Wharton School, The University of Pennsylvania

Why Investors Diversify: Spreading Your Wealth Across Assets, Industries
and Countries
Date : March 5, 2012

In 2011, Julie Yoon learned that doing some careful research and spreading your investments across a number of stocks
in the stock market, instead of putting everything into one or two companies, can boost your chances of investment
success. “The stock market is a way to make money if you are careful,” says Yoon, a senior at Plano West Senior High,
in Plano, Tex. She should know: In the Top Performer Stock Competition, sponsored by the University of Texas at
Dallas, she turned a $1 million virtual, or imaginary, investment into nearly $1.3 million in just three months.

Variety: A Smart Strategy

Industry diversification was an “important part” of Yoon’s strategy. “If I had only purchased stocks relating to
technology, for instance, I might have lost all of my money during July [2011], when the stock market was at its lowest”
and tech stocks, among others, took a hit, she says.

Diversification means that an investor should buy investments that are not concentrated in one company, industry,
country or even type of asset. When it comes to the broader practice of putting your money into different investment
vehicles, the idea is to “include different assets in your portfolio,” according to Charles Rotblut, vice president of the
American Association of Individual Investors and editor of the AAII Journal.

“You may not be able to always accurately predict the performance of a single asset, but if you’ve got a variety of assets
[such as stocks, bonds and certificates of deposit (a cash equivalent that has a guaranteed rate of profit)], you’ve got a
better chance,” he says. “You could just buy a lottery ticket, for example, but if you don’t win, you’re out the dollar or
so that you spent. But by investing in a broad way, you may lose out on some parts of your investment, but you could
still have growth in other segments.”

If you are focusing your investing on stocks, it can be important to also diversify by industry. Yoon spread her money
across eight stocks that she chose after careful research. “Since there are so many different stocks in the economy, I
always found it best to stick to only a few,” Yoon says. “If you move from stock to stock constantly, you may think that
you are gaining money, but in reality, you sacrifice a lot more money” since you’re likely to rack up brokerage fees, and
because it’s very difficult to always time your sells and buys in a way that catches the market’s highs and lows.

Early on, she selected companies like Bank of America, Google and Johnson & Johnson, representing the banking,
technology and health care sectors, respectively. “I chose these stocks because I had found positive information and
thought there was a good chance they were going to be successful during the summer,” she notes.

But when the stock market fell, she chose some “Trading-Inverse Equity” funds, like Direxion Financial Bear 3X, which
were designed to move against the flow of the market, which at that time was suffering. “These stocks moved in the
opposite direction the stock market moved,” Yoon says. “So when the stock market was going down, these stocks would
be increasing at an incredible rate. I researched my stock picks by looking at the stocks that economists and other
professionals thought would do well. I also used a free virtual trading website to look at what stocks virtual traders
around the world were purchasing.”

Bad News Can ‘Drag You Down’

Yoon had a lot of virtual dollars to invest, but when it comes to playing the market with actual cash, teen investors
usually have a small amount of discretionary funds, or extra money. Rotblut suggests they consider investing in a mutual
fund (a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds), or an
exchange-traded fund, which is a stock-like investment fund that is traded on an exchange. “ETFs and mutual funds can
give you a broad portfolio even if you have only a small amount to invest,” he says. “If small investors try to buy the
stocks outright, they may be over-concentrated, and some bad news from one company could drag them down.”

Besides investing in different companies, Rotblut says investors should also look at different countries. “Some ETFs and
mutual funds hold shares in companies that are scattered across the globe, or are in emerging markets like China and
Brazil” that are going through rapid growth and industrialization, he says. “Think of it like making a meal. The more
ingredients you use, the tastier it’s likely to be.”

Yoon says she learned a lot from the stock market competition, and plans to do some investing with her own money. “I
actually did not know anything about the stock market before I got involved with the program,” she notes. “However,
after becoming involved, I borrowed books and learned more. I do plan on investing in the stock market in the future. I
find it very exciting to be a part of the economy on a broad level.”

Discussion Questions:

What does it mean to diversify your investments?

Why is it important to diversify by industry if you are investing in stocks? If you love the oil sector, why not invest in
six different oil companies?

Why might it make sense to invest in assets related to an emerging economy like Brazil?