Diversification and Risk
Don't Put all your Eggs in One Basket
Diversification and Risk
Don't Put all your Eggs in One Basket
If you place all of your savings in
a single savings or investment
instrument, such as a single
company's stocks or bonds, and
that company fails, you could
lose everything, much like
dropping the basket that holds
all of your eggs.
Diversification and Risk
Would you bet $100 on a coin flip if the deal were that you keep
your $100 and receive an additional $5.00 for heads?
Would you bet $100 on a coin flip if the deal were that you keep
your $100 and receive an additional $100 for heads?
Would you bet $100 on a coin flip if the deal were that you keep
your $100 and receive an additional $400 for heads?
Diversification and Risk
Forms of Saving and Investing:
·Checking accounts
·Savings accounts
·Certificates of Deposit
·Bonds
·Mutual Funds
·Stocks
·Real Estate
·Collectibles
·Commodities
Diversification and Risk
Forms of Saving and Investing
• Checking account – an account at a bank against which
checks can be drawn by the account depositor
• Savings account – a bank account that earns interest
• Certificates of Deposit – a certificate issued by a bank to
a person depositing money for a specified length of time
• Bonds – An investor loans money to an entity (corporate
or governmental) that borrows the funds for a defined
period of time at a fixed interest rate
Diversification and Risk
Forms of Saving and Investing
• Mutual Fund – made up of a pool of funds collected from
many investors for the purpose of investing in stocks, bonds,
and other assets. Investors own small amounts of many
different assets.
• Stocks – a type of security that signifies ownership in a
corporation and represents a claim on part of the corporations
assets and earnings.
• Real Estate - property consisting of land and buildings
• Collectibles – an item valued and sought by collectors
• Commodities – a raw material or primary agricultural product
that can be bought and sold, such as copper or coffee
Diversification and Risk
The Pyramid of Risks and Reward
Highest Risk - Highest Potential Return or Loss
10. commodities
9. collectibles
8. real estate
7. stocks
6. mutual funds
5. corporate bonds
4. government bonds
3. certificates of deposit
2. savings accounts
1. cash and checking accounts
Lowest Risk - Lowest Potential Return or Loss
Diversification and Risk
Using the Pyramid of Risks and Reward, explain why
you think Commodities, Collectibles, and Real Estate
have the highest potential return or loss.
Using the Pyramid of Risks and Reward, explain why
checking accounts, savings accounts and Certificate of
Deposit have the lowest potential return or loss.
Diversification and Risk
Investment Situation
You received $1,000 in gift money for your 8th-grade
graduation. You have no need for this money anytime
soon.
Identify which form(s) of Saving and Investing you think
would be the most appropriate for this situation. Explain
your answer.
Diversification and Risk
Investment Situation
You have $18,000 that you'll need for college next year.
Identify which form(s) of Saving and Investing you think
would be the most appropriate for this situation. Explain
your answer.
Diversification and Risk
Investment Situation
You inherited $10,000 from your great aunt that you
would like to use as a down payment on a house you
plan to buy next year.
Identify which form(s) of Saving and Investing you
think would be the most appropriate for this situation.
Explain your answer.