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Call TEA Copyrights with any questions you have.
Copyright © Texas Education Agency, 2013. All rights reserved.
2
What is
Risk?
How is it
measured?
How do I
avoid it?
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• The possibility of
the loss of an
investment
• Dollars or
• percentage
• No guarantees,
but diversification
can reduce it
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
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
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4
Direct relationship
 As risk increases, return increases
 The lower the risk, the lower the return
Risk

Return
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5
Risk Averseavoid risk if
possible
Risk Seekinglook for risky
investments
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Neutral-just
want a high
return without
considering
risk
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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+
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Risk
Significance
Liquidity
Risk that the investment may not be able to be
converted to cash when needed
Market
Risk that affects the market as a whole; affects
mutual funds more than individual stocks
Business
Risk of a company going out of business; affects
stocks and corporate bonds
Inflation
Risk that the inflation rate will be higher than your
rate of return
Interest Rate
Risk that the interest rate will increase and your
fixed-interest investments will be worth less
Exchange Rate
Risk that currency values can decrease causing
foreign investments to be worth less
Political
Risk that government events or actions can affect
the value of your investments
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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

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
Equities
› Stocks
› Mutual funds

Fixed Income Securities
› Government bonds
› Corporate bonds

Cash Equivalents
› Bank accounts
› Money market accounts
› Certificates of Deposit

Real Estate
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10
Futures,
Penny
Stocks
Corporate
Bonds,
Large
Cap
Stocks
Government
Bonds
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Checking
and
Savings
Accounts
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U.S. Savings
Bonds
Checking/Savings
Accounts
Certificates of
Deposit
Money Market
Accounts
Mutual Funds
High credit-rating
corporate bonds
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12
Preferred
Stock
High
Quality
Stocks
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Largecap
Stocks
Growth
Stocks
13
Smalland Midcap
Stocks
Mutual
Funds in
same
industry
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Futures,
commodities,
collectibles
Penny
Stocks
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

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.
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
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.
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