Student Activity Packet - 2020-21Mr. Marynovskyy
Semester Course7.3 Bonds, Diversification, & Asset AllocationStudent Activity PacketName: [SAMPLE -- Answers are not inclusive of all possible correct responses.]In this lesson, you will learn to: Explain what a bond is and how an investor makes money from it Read a bond fund fact sheetUnderstand the importance of diversifying your investment portfolioResourcesQuestions1 Discussion PromptsDiscuss these questions with your classmates or with a partner.Estimated time: 5 minsLet’s say your friend wants to invest all of her saved money into ONE individual stock. Is this a good idea? Why or why not? Your friend is taking on a lot of risk by not diversifying their portfolio so they have "all their eggs in one basket" and if stock performs poorly, they will too. It is difficult to consistently pick stocks that outperform the stock market which means it’s often advisable to just “buy the market” through an index fund (e.g., S&P 500 fund). 2Investing Basics: BondsWhen investing, it’s a good idea to have a mix of stocks and bonds in your portfolio. Watch this video to learn more about what bonds are and answer the questions. Estimated time: 6 minsIn your own words, explain what a bond is and how you would make money from it. A loan that is given to a company or government by investors and they are then given the money back along with interest.Why is it a good idea to invest in both bonds and stocks? Bonds can help stabilize the risks of stocks if someone is a more aggressive investor; if your stocks perform poorly, at least you’ll have the steady progress of your bonds. For more income-oriented investors, stocks can help protect bonds from inflation; usually, the stock market as a whole produces better results than inflation. What is the risk you are taking when investing in bonds? How can you minimize this risk? The issuer of the bond (a.k.a. the company) might default not being able to pay you back. You can minimize this risk by making sure the company’s bond you own is not a high risk company with a high probability of paying you back. While not perfect, there are bond ratings that can help an investor determine the riskiness of a bond. Why does the value of your bond decrease when interest rates increase? When interest rates increase, companies issue bonds with higher interest rates so your existing bond (which has lower interest rates) will be worth less. 3Bond Fund Fact SheetNow that you know what a bond is, let’s take a look at how you would read a bond fund fact sheet. Read through the first resource on the 1st page of this worksheet. Skip the 2nd resource and move onto the questions. Estimated time: 14 mins4The Power of DiversificationOne of the main benefits of investing in a fund, rather than in individual stocks and bonds, is diversification, or the spreading of risk. Watch this short video through 2:19 to learn more. Then, answer the questions. Estimated time: 5 mins What is meant by “asset allocation?”How much money you put in different types of investments such as stocks and bonds.Once you’ve done asset allocation, what’s the next level of diversification you should do among each asset class?You want to own different investments in each asset class. Examples would include:Purchase stock in small, medium and large companies or stock in both U.S. based and international companies. Purchase bonds issued by the government and corporations over different terms (e.g., 5 year, 10 year, 30 years)How does diversification protect investors?Diversification helps lower your risk by reducing the volatility or how much your investments will go up or down over time. It doesn’t guarantee that you will make money on your investments. 5DATA CRUNCH: How Does Your Asset Mix Impact Your Returns? In the last video, you learned the power of diversifying your portfolio. Answer the questions on this worksheet to complete the Data Crunch and to see exactly how diversification can impact your returns. Estimated time: 10 mins6Exit TicketFollow your teacher’s directions to complete the Exit Ticket.Estimated time: 5 mins What is a bond and how do you make money from it? A loan that is given to a company or government by investors and they are then given the money back along with interest.How can you minimize any risk you may have from investing in bonds? You can check the rating on the bond before you purchase itOwn government bonds because they tend to be considered almost risk-free which means you can expect to receive your interest and principal if you are investing in a single bond. Explain the importance of diversifying your investment portfolio. It minimizes the risk - if one of your investments loses value the rest of your portfolio will make up for it, allowing you to still make money overall. ................
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