Investment Models Securities and Investments Finance Lesson Plan
Performance Objective Students will describe various methods used in analyzing investments. Specific Objective  Students will explain the Capital Asset Pricing Model.  Students will explain the Modern Portfolio Theory.  Students will explain the Arbitrage Pricing Theory.  Students will compare and contrast the various investment selection strategies. Terms  Risk – the possibility of losing some, if not all, of an investment  Return – ideally the gain on an investment, but may be a loss; the higher the risk, the higher the return  Asset allocation – diversification, or spreading out investments to try to balance risk and reward in a portfolio  Capital Asset Pricing Model – a pricing model for riskier investments that generates a higher expected rate of return  Arbitrage Pricing Theory – assumes an investment may not be priced accurately so it looks at past performance of the investment itself as opposed to the whole market  Modern Portfolio Theory – emphasizes diversification of assets to balance out the risk in a portfolio  Portfolio – a grouping of different financial investment types  Large cap stocks – companies whose market capitalization (the number of outstanding shares multiplied by the price per share) is greater than $10 billion  Mid cap stocks – companies whose market cap. is between $2 and $10 billion  Small cap stocks – companies whose market cap is less than $2 billion but greater than $300 million  Bonds – basically a loan that a government entity or corporation makes to investors with the promise to pay back the amount plus interest at a later date  Mutual funds – a grouping of individual securities that investors can purchase shares in while being managed by a fund manager for a fee  Venture capital‐money invested by an investor in new or small businesses that may have high growth potential, risky investment for the venture capitalist (the investor) Time When taught as written, this lesson should take approximately 2‐3 class periods to complete. Preparation
TEKS Correlations: Copyright © Texas Education Agency, 2013. All rights reserved. 1 This lesson, as published, correlates to the following TEKS. Any changes/alterations to the activities may result in the elimination of any or all of the TEKS listed. 130.164 (b) Knowledge and Skills (2) The student maintains, monitors, controls and plans the use of financial resources in order to perform key duties in the securities and investments industry. The student describes investment analysis and selection processes. The student is expected to: (G) describe fundamental analysis used in making investment decisions; (H) relate the nature of technical analysis; (I) verbalize strategies for selecting investments; (J) identify performance measurements for venture capital; and (K) describe investment analysis and selection theory including the Modern Portfolio Theory, Capital Asset Pricing Model, and the Arbitrage Pricing Theory. Interdisciplinary Correlations: English‐English I  110.31(b)(1) … understand new vocabulary and use it when reading and writing.  110.31(b)(11)(B) … analyze factual, quantitative, or technical data presented in multiple graphical sources.  110.31(b)(21)(B). …organize information gathered from multiple sources to create a variety of graphics and forms.  110.31(b)(23)(C) …use graphics and illustrations to help explain concepts where appropriate. Math‐Algebra I  111.32(b)(1)(E). Interpret and make decisions, predictions, and critical judgments from functional relationships. Social Studies‐World Geography  113.34(c)(20)(A) Describe the impact of new technologies, new markets, and revised perceptions of resources. Occupational Correlation (O*Net – www.onetonline.org/): Job Title: Personal Financial Advisors O*Net Number: 13‐2052.00 Reported Job Titles: Portfolio Manager, Financial Planner, Certified Financial Planner (CFP) Tasks: Manage client portfolios, keeping client plans up‐to‐date. Answer clients' questions about the purposes and details of financial plans and strategies. Prepare or interpret for clients information such as investment performance reports, financial document summaries, or income projections. Soft Skills: Active Listening, Judgment and Decision Making, Writing Copyright © Texas Education Agency, 2013. All rights reserved. 2 Accommodations for Learning Differences It is important that lessons accommodate the needs of every learner. These lessons may be modified to accommodate your students with learning differences by referring to the files found on the Special Populations page of this website. Preparation  Have materials and websites ready to go prior to the start of the lesson.  Review and familiarize yourself with the terminology. References  http://investor.gov/publications‐research‐studies/info‐sheets/beginners‐guide‐to‐asset‐allocation  Investing in Your Future, Southwestern Publishing  sba.gov/content/venture‐capital Instructional Aids  Lesson Presentation  Instructor Computer/Projection Unit  Online Websites Introduction
The main purposes of this lesson are to help students understand:  That there are different methods of selecting investments  That there are statistical ways to analyze investments. Ask students how they would go about selecting how to invest their money. Discuss with them that beginning investors usually buy what they know, in the case of stocks Ask students if they have ever made a decision based on a ‘feeling’ instead of conducting research. It doesn’t mean the method of the decision‐making is wrong, but let them know there are other ways of making decisions, especially when it comes to financial decisions. Copyright © Texas Education Agency, 2013. All rights reserved. 3 Outline
I. Why use investment models? A. All investors expect to earn money on their investments. B. All investors would like to be able to predict the future. C. Investing can be very risky. D. All investors want to eliminate as much risk as possible. E. Investment models provide tools for selecting investments. II. Measures of Risk A. Beta‐how a stock performs relative to the industry as a whole. B. Variance‐the calculation of the measurement of risk involved, can be reduced through diversification III. Capital Asset Pricing Model (CAPM) A. Used for pricing risky securities B. Includes a return for a risk‐
free security in addition to a premium for a risky security. C. Uses beta as a measure of risk D. Includes risk that cannot be eliminated through diversifying E. Includes risk that can be reduced through diversifying IV. Modern Portfolio Theory A. Assumes there is market
We have discussed risk a great deal and that is the purpose of investment models. These models are simply a mathematical tool to determine the value of potential investments. These calculations can be complicated and may be out of the scope of this lesson, but the various aspects of these models are what it is important. They are all designed to reduce as much risk as possible. A beta measure is simple to locate by searching online. Show students the beta for several companies. If it is greater than one, that company is more volatile than the industry it is in. Show students what a formula looks like for the CAPM so students see what actually goes into a detailed formula such as this. Many investors informally use the Modern Portfolio Theory without even realizing it, as Multiple Intelligences Guide Existentialist Interpersonal Intrapersonal Kinesthetic/ Bodily Logical/ Mathematical Musical/Rhythmic Naturalist Copyright © Texas Education Agency, 2013. All rights reserved. 4 Verbal/Linguistic Visual/Spatial risk but still diversifies B. Diversification helps to balance risk C. The risk on one stock or investment is greater than a combination of investments. V. Arbitrage Pricing Theory A. Created by Stephen Ross in 1976 B. Assumes the asset being considered may not be priced accurately C. Studies the individual investments as opposed to only the market as a whole. VI. Venture Capital A. Money invested in a new or small business with a high growth potential B. Extremely risky investments C. Investors are part owners. D. Funds are created as a pool of venture capital monies. E. More risky than a mutual fund because of instability of new companies F. Contribute seed or startup money G. Contribute money for marketing or other purposes H. Performance measurement for the fund is the Internal Rate of Return of the fund itself, the interest earned. it generally means that having a portfolio of investments reduces risk better than having a single investment. The APT takes into consideration the individual betas of each of the stocks in a portfolio and not just an average beta for the entire portfolio. Have students in pairs search for the betas of five different companies and write them down separately. Then take an average of the five and write that down. Call on different pairs of students and ask them if their overall beta is higher or lower than one. Then ask them, of the five separate betas, which ones in particular stand out as high or low. This activity makes us look at the different industries that these companies are in, to see if our ‘portfolio’ may require more diversification. This is a greatly simplified version of comparing the different models. Venture capital funds would have a high beta as they are known to be very volatile. Multiple Intelligences Guide Existentialist Interpersonal Intrapersonal Kinesthetic/ Bodily Logical/ Mathematical Musical/Rhythmic Naturalist Copyright © Texas Education Agency, 2013. All rights reserved. 5 Verbal/Linguistic Visual/Spatial Application
Guided Practice  Go online with the students and search for examples of the different investment models and note their similarities and differences.  As you search different sites for comparisons of the different models, have students discuss what concepts each of the models discusses that are common with previous lessons (for example, risk, diversification) Independent Practice  Students should conduct their own research on the three models discussed in this lesson and write which model they would prefer any why on an index card. Summary
Review Ask students these questions either as a quiz or using exit tickets over a couple of class periods. Question #1: What is the benefit of using and investment model to value securities? Answer #1: Investment models can help to reduce risk which is a goal of investors. Question #2: What does beta measure? Answer #2: Beta measures a company’s stock volatility relative to the industry that the company is part of. Question #3: What is the Capital Asset Pricing Model primarily used for? Answer #3: CAPM is generally used to price risky securities. Question #4: What is the main premise of the Modern Portfolio Theory? Answer #4: That a single investment is more risky than a combination of investments. Question #5: What is a main difference between CAPM and the Arbitrage Pricing Theory? Answer #5: The APT considers individual betas as opposed to the beta of an entire portfolio. Evaluation
Informal Assessment Any and all of the following can be used as informal assessmen :  Class discussion  Exit tickets for any questions students have about this topic Formal Assessment  Asset Allocation Scenarios Assignment #1 – Given the following three scenarios, create a pie chart for each displaying your recommendation for investment in different types of securities based upon the needs presented in each scenario. You may use spreadsheet software to create the pie charts or create them on posterboard, clearly displaying each scenario, clearly‐labeled investments and percentages, and a paragraph summarizing your rationale for each scenario’s asset allocation. Following are the scenarios: 1) John is in his twenties, moderate income, single, very little in the way of assets, does not mind taking risks, 2) Mary has only a few years until she retires, has a high value of Copyright © Texas Education Agency, 2013. All rights reserved. 6 
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assets (house, cars, money to invest), but prefers safer (less risky) investments, 3) Ben is in his 40s, has a small amount of assets (car, electronics), and prefers a good balance between risky and conservative investments. Your pie charts will address percentages for cash, bonds, mutual funds, and stocks of large‐, mid‐, and small‐cap companies. Asset Allocation Timeline Assignment #2 – In pairs students are to create a timeline for every ten years of life, from 20 to 60. They will add the different levels of risk tolerance for what they believe is typical for each time period. Then they will provide a short‐term and long‐term financial goal for each period on the timeline. They should include a graphic or some sort of visual for each of the goals listed. Then they will provide one investment for each of the time periods that is appropriate for the time period and financial goals. They may do this on a word processing document or on flipchart paper. Investment Strategy Brochure Assignment #3 – Students will create a six‐panel brochure in a word processing program from the point‐of‐view of someone who is instructing another student about the different pricing models. The student should include sections about beta and what it means, major points about the different models, including who created the models, pros and cons for each model, and a section about what the student has learned about risk so far. Examples of each model can also be included. This assignment will require Internet research to increase understanding. The brochure should look professional when completed. Enrichment
Extension Interview an investment professional and ask what they know in a one‐sentence summary of each of the models in this lesson. Ask if they use any of the models or if there is another one that they prefer to use. Write or type up a summary of your findings. Copyright © Texas Education Agency, 2013. All rights reserved. 7 Investment Models Asset Allocation Pie Graph Assignment #1 Student Name ______________________ CATEGORY 20 10 8 Visual Elements Clear coloring Unclear labeling Missing some and labeling of all or coloring of key labeling or items. items. distinct coloring of key items. 1 Missing most labeling or coloring of key items. Mechanics No mechanical or No major mathematical mechanical or errors. mathematical errors. Some mechanical Many mechanical or mathematical or mathematical errors. errors. Content Knowledge Graphs and recommendation demonstrate exceptional knowledge of topic. Graphs and recommendation missing several relevant aspects of topic. Graphs or recommendation demonstrate adequate knowledge of topic. Graphs and recommendation demonstrates little, if any, knowledge of topic. Summary Recommendation Recommendation Recommendation Recommendation Recommendation is thorough and is adequate and is lacking some is missing or does matches data in generally information from not connect to graphs. matches data in graphs. graphs at all. graphs. Appearance Graphs and recommendation are very professional and neat in appearance. Graphs and recommendation are adequate in appearance. Graphs or recommendation are somewhat incomplete or unorganized in appearance. Maximum Points Possible 100 Student Points ______ Copyright © Texas Education Agency, 2013. All rights reserved. 8 Graphs and recommendation are inadequate and not neat in appearance. Investment Models Asset Allocation Timeline Assignment #2 Student Name ______________________ CATEGORY 20 15 8 Spelling and Capitalization Spelling and Spelling and capitalization are capitalization correct were mostly throughout. correct . Spelling and capitalization were mostly correct. There were many spelling and capitalization errors. Content/Facts Facts were appropriate for all events reported on the timeline. Facts were appropriate for almost all events reported on the timeline. Facts were appropriate for most (~75%) of the events reported on the timeline. Facts were often inappropriate for events reported on the timeline. Learning of Content The student can accurately describe 75% (or more) of the events on the timeline without refering to it. The student can The student can accurately describe any describe 50% of event on the the events on timeline if the timeline allowed to refer without referring to it. to it. The student cannot use the timeline effectively to describe events nor to compare events. Resources The timeline contained at least 8‐10 events related to the topic being studied. The timeline contained at least 6‐7 events related to the topic being studied. The timeline contained at least 5 events related to the topic being studied. The timeline contained fewer than 5 events. An accurate time frame has been included for almost every event. Time frames are inaccurate and/or missing for several events. Dates 1 An accurate, An accurate, complete time complete time frame has been frame has been included for each included for event. almost every event. Maximum Points Possible 100 Student Points _________ Copyright © Texas Education Agency, 2013. All rights reserved. 9 Investment Models Investment Strategy Brochure Assignment #3 Student Name ______________________ CATEGORY 20 10 8 1 Attractiveness & The brochure Organization has exceptionally attractive formatting and well‐organized information. The brochure has attractive formatting and well‐organized information. The brochure has well‐
organized information. The brochure\'s formatting and organization of material are confusing to the reader. Knowledge Gained Student demonstrates exceptional knowledge of the topic in this brochure. Student demonstrates adequate knowledge of the topic in the brochure. Student demonstrates sketchy knowledge of investment strategies. Student has very little knowledge, if any, of topic. Writing ‐ Mechanics Capitalization and punctuation are correct throughout the brochure. Capitalization and punctuation are correct throughout the brochure after feedback from an adult. There are 1‐2 capitalization and/or punctuation errors in the brochure even after feedback from an adult. There are several capitalization or punctuation errors in the brochure even after feedback from an adult. Content ‐ Accuracy All facts in the brochure are accurate. 99‐90% of the facts in the brochure are accurate. 89‐80% of the facts in the brochure are accurate. Fewer than 80% of the facts in the brochure are accurate. Graphics/Pictures Graphics go well Graphics go well Graphics go well Graphics do not with the text and with the text, with the text, go with the there is a good but there are so but there are too accompanying mix of text and many that they few and the text or appear to graphics. distract from the brochure seems be randomly text. \"text‐heavy\". chosen. Maximum Points Possible 100 Copyright © Texas Education Agency, 2013. All rights reserved. 10 Student Points _________ Copyright © Texas Education Agency, 2013. All rights reserved. 11