Decisions, Money & Entrepreneurship
Risk, Return, And Diversification
This lesson helps students understand risk, return, diversification, and the effect of fees. They compare investment choices and build a Simple Portfolio Sketch.
What you will learn
- Understand that higher expected returns almost always come with higher short term volatility, and that the 'risk' in risk-return is usually about short term ups and downs rather than total loss.
- Understand why owning many different things at once reduces overall risk without reducing expected return by the same amount, and why diversification is often called 'the only free lunch in investing'.
- Understand why fees and costs matter enormously in long term investing and why low cost funds almost always beat high cost funds over long periods.
- Combine the ideas of risk-return, diversification, and low cost to sketch a Simple Portfolio for a realistic long term investor.
What happens in this lesson
Chapter 1: Risk And Return
Understand that higher expected returns almost always come with higher short term volatility, and that the 'risk' in risk-return is usually about short term ups and downs rather than total loss.
What you make: A saved risk note ranking three familiar investment options from lowest to highest expected return and explaining what kind of risk goes with each.
Chapter 2: Diversification
Understand why owning many different things at once reduces overall risk without reducing expected return by the same amount, and why diversification is often called 'the only free lunch in investing'.
What you make: A saved diversification note explaining why spreading money across many different companies is less risky than concentrating in one or two, using a specific example.
Chapter 3: Costs And Fees
Understand why fees and costs matter enormously in long term investing and why low cost funds almost always beat high cost funds over long periods.
What you make: A saved cost comparison note showing the difference between a high fee and a low fee fund for a specific investor over 30 years.
Chapter 4: Simple Portfolio Sketch
Combine the ideas of risk-return, diversification, and low cost to sketch a Simple Portfolio for a realistic long term investor.
What you make: A saved Simple Portfolio Sketch showing a diversified, low cost mix of investments for a specific realistic investor, with rough allocations and a one line rationale.
Chapter 5: When The Plan Changes
Adapt a simple portfolio to a new real constraint and explain the tradeoffs between risk, return, diversification, and cost.
What you make: A saved portfolio revision note showing how one original Simple Portfolio Sketch changes for a new investor situation, with a short explanation of what changed and why.
Key terms in this lesson
Bond
A loan you make to a government or company. They pay you fixed interest, then return your money on an agreed date.
Diversification
Spread money across different things so one bad result does not sink the whole pile.
Risk and Return
Bigger possible gains usually come with bigger possible losses. There is no free lunch in finance.
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