2. Table of Contents Access Prior Knowledge New Information Set Goals
Activity
Conclusion
Stock Market Game
The Financial System
Learning Targets
Basics of the
Financial System
Risk and Reward
The Financial System
Learning Targets
Functions of the
Financial System
Types of
Financial Assets
Financial
Intermediaries
The Stock Market
Stock Market
Expectations

3. Stock Market Game
The class will be divided into groups of 4 or 5 students. Each group member will pick and track two stocks using the list of companies from the Dow Jones Industrial Average. Each company can only be chosen once within your group. You have $1,000 for each of your two stocks ($2,000 total). Calculate the values of your two stocks each year from 2008 to The yearly values will be revealed one at a time. After the final year, add each group member’s profits (or losses) together. The group that makes the most money wins!
Go to the Data
Refer to the Lesson Plan document for instructions on how to make this Warm Up Activity a success. Each student will need his/her own worksheet and a calculator.

4. Stock Market Game
Company
2008
2009
2010
2011
2012
2013 3M
Alcoa
American Express
AT&T
Bank of America
Boeing
Caterpillar
Chevron
Cisco Systems
Coca-Cola
DuPont
ExxonMobil
General Electric
Hewlett-Packard
Home Depot
Company
2008
2009
2010
2011
2012
2013
Intel
IBM
Johnson & Johnson
JPMorgan Chase
McDonald’s
Merck
Microsoft
Pfizer
Procter & Gamble
Travelers
UnitedHealth
United Technologies
Verizon
Wal-Mart
Walt Disney
The data listed in these tables refer to the price per share of stock on January 1 of the indicated year. You can explain that these are the 30 companies listed in the Dow Jones Industrial Average for They can change slightly from year to year.
Show 2008 Data

5. Stock Market Game
Company
2008
2009
2010
2011
2012
2013 3M
Alcoa
American Express
AT&T
Bank of America
Boeing
Caterpillar
Chevron
Cisco Systems
Coca-Cola
DuPont
ExxonMobil
General Electric
Hewlett-Packard
Home Depot
Company
2008
2009
2010
2011
2012
2013 3M
84.24
Alcoa
36.46
American Express
52.09
AT&T
41.51
Bank of America
41.53
Boeing
87.57
Caterpillar
72.56
Chevron
93.96
Cisco Systems
27.00
Coca-Cola
30.73
DuPont
44.15
ExxonMobil
94.15
General Electric
37.10
Hewlett-Packard
50.48
Home Depot
27.13
Company
2008
2009
2010
2011
2012
2013
Intel
26.28
IBM
108.9
Johnson & Johnson
66.56
JPMorgan Chase
43.55
McDonald’s
59.48
Merck
58.15
Microsoft
35.79
Pfizer
22.76
Procter & Gamble
73.59
Travelers
53.66
UnitedHealth
57.19
United Technologies
76.64
Verizon
40.84
Wal-Mart
47.41
Walt Disney
32.32
Company
2008
2009
2010
2011
2012
2013
Intel
IBM
Johnson & Johnson
JPMorgan Chase
McDonald’s
Merck
Microsoft
Pfizer
Procter & Gamble
Travelers
UnitedHealth
United Technologies
Verizon
Wal-Mart
Walt Disney
Students should use these numbers to determine how many shares of each stock they can buy with $1,000. There are instructions on their worksheets. To find how many shares they will own for this game, divide $1,000 by the corresponding value in these tables. The result is the number of shares purchased.
Show 2009 Data

6. Stock Market Game
Company
2008
2009
2010
2011
2012
2013 3M
84.24
57.55
Alcoa
36.46
11.36
American Express
52.09
19.20
AT&T
41.51
28.74
Bank of America
41.53
13.92
Boeing
87.57
42.80
Caterpillar
72.56
44.91
Chevron
93.96
74.23
Cisco Systems
27.00
16.41
Coca-Cola
30.73
22.70
DuPont
44.15
25.42
ExxonMobil
94.15
80.06
General Electric
37.10
16.51
Hewlett-Packard
50.48
36.25
Home Depot
27.13
23.07
Company
2008
2009
2010
2011
2012
2013 3M
84.24
Alcoa
36.46
American Express
52.09
AT&T
41.51
Bank of America
41.53
Boeing
87.57
Caterpillar
72.56
Chevron
93.96
Cisco Systems
27.00
Coca-Cola
30.73
DuPont
44.15
ExxonMobil
94.15
General Electric
37.10
Hewlett-Packard
50.48
Home Depot
27.13
Company
2008
2009
2010
2011
2012
2013
Intel
26.28
14.69
IBM
108.9
83.89
Johnson & Johnson
66.56
60.13
JPMorgan Chase
43.55
31.19
McDonald’s
59.48
62.38
Merck
58.15
30.46
Microsoft
35.79
19.53
Pfizer
22.76
17.88
Procter & Gamble
73.59
61.69
Travelers
53.66
45.26
UnitedHealth
57.19
26.70
United Technologies
76.64
53.46
Verizon
40.84
31.88
Wal-Mart
47.41
55.98
Walt Disney
32.32
Company
2008
2009
2010
2011
2012
2013
Intel
26.28
IBM
108.9
Johnson & Johnson
66.56
JPMorgan Chase
43.55
McDonald’s
59.48
Merck
58.15
Microsoft
35.79
Pfizer
22.76
Procter & Gamble
73.59
Travelers
53.66
UnitedHealth
57.19
United Technologies
76.64
Verizon
40.84
Wal-Mart
47.41
Walt Disney
32.32
Allow students time to calculate their new totals before revealing the next year’s data. They should find their new “Value” by multiplying the number of shares they own by the corresponding number from the tables.
Show 2010 Data

7. Stock Market Game
Company
2008
2009
2010
2011
2012
2013 3M
84.24
57.55
83.09
Alcoa
36.46
11.36
16.47
American Express
52.09
19.20
40.81
AT&T
41.51
28.74
28.41
Bank of America
41.53
13.92
15.24
Boeing
87.57
42.80
55.72
Caterpillar
72.56
44.91
57.65
Chevron
93.96
74.23
78.20
Cisco Systems
27.00
16.41
24.11
Coca-Cola
30.73
22.70
28.58
DuPont
44.15
25.42
33.98
ExxonMobil
94.15
80.06
68.72
General Electric
37.10
16.51
15.22
Hewlett-Packard
50.48
36.25
51.54
Home Depot
27.13
23.07
29.15
Company
2008
2009
2010
2011
2012
2013 3M
84.24
57.55
Alcoa
36.46
11.36
American Express
52.09
19.20
AT&T
41.51
28.74
Bank of America
41.53
13.92
Boeing
87.57
42.80
Caterpillar
72.56
44.91
Chevron
93.96
74.23
Cisco Systems
27.00
16.41
Coca-Cola
30.73
22.70
DuPont
44.15
25.42
ExxonMobil
94.15
80.06
General Electric
37.10
16.51
Hewlett-Packard
50.48
36.25
Home Depot
27.13
23.07
Company
2008
2009
2010
2011
2012
2013
Intel
26.28
14.69
20.79
IBM
108.9
83.89
131.2
Johnson & Johnson
66.56
60.13
64.71
JPMorgan Chase
43.55
31.19
41.79
McDonald’s
59.48
62.38
62.63
Merck
58.15
30.46
36.82
Microsoft
35.79
19.53
30.62
Pfizer
22.76
17.88
18.27
Procter & Gamble
73.59
61.69
61.11
Travelers
53.66
45.26
50.15
UnitedHealth
57.19
26.70
31.38
United Technologies
76.64
53.46
70.21
Verizon
40.84
31.88
31.21
Wal-Mart
47.41
55.98
53.74
Walt Disney
32.32
32.50
Company
2008
2009
2010
2011
2012
2013
Intel
26.28
14.69
IBM
108.9
83.89
Johnson & Johnson
66.56
60.13
JPMorgan Chase
43.55
31.19
McDonald’s
59.48
62.38
Merck
58.15
30.46
Microsoft
35.79
19.53
Pfizer
22.76
17.88
Procter & Gamble
73.59
61.69
Travelers
53.66
45.26
UnitedHealth
57.19
26.70
United Technologies
76.64
53.46
Verizon
40.84
31.88
Wal-Mart
47.41
55.98
Walt Disney
32.32
Allow students time to calculate their new totals before revealing the next year’s data.
Show 2011 Data

8. Stock Market Game
Company
2008
2009
2010
2011
2012
2013 3M
84.24
57.55
83.09
86.75
Alcoa
36.46
11.36
16.47
15.82
American Express
52.09
19.20
40.81
43.30
AT&T
41.51
28.74
28.41
29.68
Bank of America
41.53
13.92
15.24
13.85
Boeing
87.57
42.80
55.72
66.15
Caterpillar
72.56
44.91
57.65
94.38
Chevron
93.96
74.23
78.20
91.66
Cisco Systems
27.00
16.41
24.11
20.45
Coca-Cola
30.73
22.70
28.58
32.94
DuPont
44.15
25.42
33.98
50.05
ExxonMobil
94.15
80.06
68.72
73.72
General Electric
37.10
16.51
15.22
18.49
Hewlett-Packard
50.48
36.25
51.54
42.22
Home Depot
27.13
23.07
29.15
35.20
Company
2008
2009
2010
2011
2012
2013 3M
84.24
57.55
83.09
Alcoa
36.46
11.36
16.47
American Express
52.09
19.20
40.81
AT&T
41.51
28.74
28.41
Bank of America
41.53
13.92
15.24
Boeing
87.57
42.80
55.72
Caterpillar
72.56
44.91
57.65
Chevron
93.96
74.23
78.20
Cisco Systems
27.00
16.41
24.11
Coca-Cola
30.73
22.70
28.58
DuPont
44.15
25.42
33.98
ExxonMobil
94.15
80.06
68.72
General Electric
37.10
16.51
15.22
Hewlett-Packard
50.48
36.25
51.54
Home Depot
27.13
23.07
29.15
Company
2008
2009
2010
2011
2012
2013
Intel
26.28
14.69
20.79
21.01
IBM
108.9
83.89
131.2
147.2
Johnson & Johnson
66.56
60.13
64.71
62.63
JPMorgan Chase
43.55
31.19
41.79
43.00
McDonald’s
59.48
62.38
77.10
Merck
58.15
30.46
36.82
36.29
Microsoft
35.79
19.53
30.62
28.05
Pfizer
22.76
17.88
18.27
17.70
Procter & Gamble
73.59
61.69
61.11
64.39
Travelers
53.66
45.26
50.15
56.09
UnitedHealth
57.19
26.70
31.38
36.38
United Technologies
76.64
53.46
70.21
79.19
Verizon
40.84
31.88
31.21
36.06
Wal-Mart
47.41
55.98
53.74
54.23
Walt Disney
32.32
32.50
37.74
Company
2008
2009
2010
2011
2012
2013
Intel
26.28
14.69
20.79
IBM
108.9
83.89
131.2
Johnson & Johnson
66.56
60.13
64.71
JPMorgan Chase
43.55
31.19
41.79
McDonald’s
59.48
62.38
62.63
Merck
58.15
30.46
36.82
Microsoft
35.79
19.53
30.62
Pfizer
22.76
17.88
18.27
Procter & Gamble
73.59
61.69
61.11
Travelers
53.66
45.26
50.15
UnitedHealth
57.19
26.70
31.38
United Technologies
76.64
53.46
70.21
Verizon
40.84
31.88
31.21
Wal-Mart
47.41
55.98
53.74
Walt Disney
32.32
32.50
Allow students time to calculate their new totals before revealing the next year’s data.
Show 2012 Data

9. Stock Market Game
Company
2008
2009
2010
2011
2012
2013 3M
84.24
57.55
83.09
86.75
83.76
Alcoa
36.46
11.36
16.47
15.82
8.94
American Express
52.09
19.20
40.81
43.30
48.30
AT&T
41.51
28.74
28.41
29.68
30.46
Bank of America
41.53
13.92
15.24
13.85
5.75
Boeing
87.57
42.80
55.72
66.15
74.70
Caterpillar
72.56
44.91
57.65
94.38
92.77
Chevron
93.96
74.23
78.20
91.66
108.7
Cisco Systems
27.00
16.41
24.11
20.45
18.55
Coca-Cola
30.73
22.70
28.58
32.94
35.08
DuPont
44.15
25.42
33.98
50.05
46.58
ExxonMobil
94.15
80.06
68.72
73.72
85.97
General Electric
37.10
16.51
15.22
18.49
18.23
Hewlett-Packard
50.48
36.25
51.54
42.22
26.32
Home Depot
27.13
23.07
29.15
35.20
42.41
Company
2008
2009
2010
2011
2012
2013 3M
84.24
57.55
83.09
86.75
Alcoa
36.46
11.36
16.47
15.82
American Express
52.09
19.20
40.81
43.30
AT&T
41.51
28.74
28.41
29.68
Bank of America
41.53
13.92
15.24
13.85
Boeing
87.57
42.80
55.72
66.15
Caterpillar
72.56
44.91
57.65
94.38
Chevron
93.96
74.23
78.20
91.66
Cisco Systems
27.00
16.41
24.11
20.45
Coca-Cola
30.73
22.70
28.58
32.94
DuPont
44.15
25.42
33.98
50.05
ExxonMobil
94.15
80.06
68.72
73.72
General Electric
37.10
16.51
15.22
18.49
Hewlett-Packard
50.48
36.25
51.54
42.22
Home Depot
27.13
23.07
29.15
35.20
Company
2008
2009
2010
2011
2012
2013
Intel
26.28
14.69
20.79
21.01
24.62
IBM
108.9
83.89
131.2
147.2
186.7
Johnson & Johnson
66.56
60.13
64.71
62.63
65.59
JPMorgan Chase
43.55
31.19
41.79
43.00
34.06
McDonald’s
59.48
62.38
77.10
101.3
Merck
58.15
30.46
36.82
36.29
37.88
Microsoft
35.79
19.53
30.62
28.05
26.55
Pfizer
22.76
17.88
18.27
17.70
21.86
Procter & Gamble
73.59
61.69
61.11
64.39
66.30
Travelers
53.66
45.26
50.15
56.09
60.11
UnitedHealth
57.19
26.70
31.38
36.38
51.24
United Technologies
76.64
53.46
70.21
79.19
74.91
Verizon
40.84
31.88
31.21
36.06
40.28
Wal-Mart
47.41
55.98
53.74
54.23
59.97
Walt Disney
32.32
32.50
37.74
37.97
Company
2008
2009
2010
2011
2012
2013
Intel
26.28
14.69
20.79
21.01
IBM
108.9
83.89
131.2
147.2
Johnson & Johnson
66.56
60.13
64.71
62.63
JPMorgan Chase
43.55
31.19
41.79
43.00
McDonald’s
59.48
62.38
77.10
Merck
58.15
30.46
36.82
36.29
Microsoft
35.79
19.53
30.62
28.05
Pfizer
22.76
17.88
18.27
17.70
Procter & Gamble
73.59
61.69
61.11
64.39
Travelers
53.66
45.26
50.15
56.09
UnitedHealth
57.19
26.70
31.38
36.38
United Technologies
76.64
53.46
70.21
79.19
Verizon
40.84
31.88
31.21
36.06
Wal-Mart
47.41
55.98
53.74
54.23
Walt Disney
32.32
32.50
37.74
Allow students time to calculate their new totals before revealing the next year’s data.
Show 2013 Data

10. Answer the Conclusion questions at the bottom of your sheet.
Stock Market Game
Company
2008
2009
2010
2011
2012
2013 3M
84.24
57.55
83.09
86.75
83.76
94.19
Alcoa
36.46
11.36
16.47
15.82
8.94
8.88
American Express
52.09
19.20
40.81
43.30
48.30
58.33
AT&T
41.51
28.74
28.41
29.68
30.46
34.39
Bank of America
41.53
13.92
15.24
13.85
5.75
12.05
Boeing
87.57
42.80
55.72
66.15
74.70
76.55
Caterpillar
72.56
44.91
57.65
94.38
92.77
92.95
Chevron
93.96
74.23
78.20
91.66
108.7
110.3
Cisco Systems
27.00
16.41
24.11
20.45
18.55
20.12
Coca-Cola
30.73
22.70
28.58
32.94
35.08
36.99
DuPont
44.15
25.42
33.98
50.05
46.58
45.95
ExxonMobil
94.15
80.06
68.72
73.72
85.97
87.79
General Electric
37.10
16.51
15.22
18.49
18.23
21.51
Hewlett-Packard
50.48
36.25
51.54
42.22
26.32
14.83
Home Depot
27.13
23.07
29.15
35.20
42.41
63.57
Company
2008
2009
2010
2011
2012
2013 3M
84.24
57.55
83.09
86.75
83.76
Alcoa
36.46
11.36
16.47
15.82
8.94
American Express
52.09
19.20
40.81
43.30
48.30
AT&T
41.51
28.74
28.41
29.68
30.46
Bank of America
41.53
13.92
15.24
13.85
5.75
Boeing
87.57
42.80
55.72
66.15
74.70
Caterpillar
72.56
44.91
57.65
94.38
92.77
Chevron
93.96
74.23
78.20
91.66
108.7
Cisco Systems
27.00
16.41
24.11
20.45
18.55
Coca-Cola
30.73
22.70
28.58
32.94
35.08
DuPont
44.15
25.42
33.98
50.05
46.58
ExxonMobil
94.15
80.06
68.72
73.72
85.97
General Electric
37.10
16.51
15.22
18.49
18.23
Hewlett-Packard
50.48
36.25
51.54
42.22
26.32
Home Depot
27.13
23.07
29.15
35.20
42.41
Company
2008
2009
2010
2011
2012
2013
Intel
26.28
14.69
20.79
21.01
24.62
21.15
IBM
108.9
83.89
131.2
147.2
186.7
194.1
Johnson & Johnson
66.56
60.13
64.71
62.63
65.59
71.02
JPMorgan Chase
43.55
31.19
41.79
43.00
34.06
44.98
McDonald’s
59.48
62.38
77.10
101.3
89.4
Merck
58.15
30.46
36.82
36.29
37.88
41.86
Microsoft
35.79
19.53
30.62
28.05
26.55
27.25
Pfizer
22.76
17.88
18.27
17.70
21.86
25.53
Procter & Gamble
73.59
61.69
61.11
64.39
66.30
68.65
Travelers
53.66
45.26
50.15
56.09
60.11
73.09
UnitedHealth
57.19
26.70
31.38
36.38
51.24
54.88
United Technologies
76.64
53.46
70.21
79.19
74.91
83.43
Verizon
40.84
31.88
31.21
36.06
40.28
44.49
Wal-Mart
47.41
55.98
53.74
54.23
59.97
68.93
Walt Disney
32.32
32.50
37.74
37.97
50.80
Company
2008
2009
2010
2011
2012
2013
Intel
26.28
14.69
20.79
21.01
24.62
IBM
108.9
83.89
131.2
147.2
186.7
Johnson & Johnson
66.56
60.13
64.71
62.63
65.59
JPMorgan Chase
43.55
31.19
41.79
43.00
34.06
McDonald’s
59.48
62.38
77.10
101.3
Merck
58.15
30.46
36.82
36.29
37.88
Microsoft
35.79
19.53
30.62
28.05
26.55
Pfizer
22.76
17.88
18.27
17.70
21.86
Procter & Gamble
73.59
61.69
61.11
64.39
66.30
Travelers
53.66
45.26
50.15
56.09
60.11
UnitedHealth
57.19
26.70
31.38
36.38
51.24
United Technologies
76.64
53.46
70.21
79.19
74.91
Verizon
40.84
31.88
31.21
36.06
40.28
Wal-Mart
47.41
55.98
53.74
54.23
59.97
Walt Disney
32.32
32.50
37.74
37.97
At this time, students should calculate their total profit (or loss) for the entire game as an individual and then as a group. You may give out prizes to the group that made the most money. Small pieces of candy work well.
Answer the Conclusion questions at the bottom of your sheet.

11. “The Financial System” Targets
Knowledge
Understand the importance and features of the financial system.
Reasoning
Explain how supply and demand, risk, and expectations about the future determine the interest rate (and price) for financial assets.

12. Basics of the Financial System
The stock market is just one part of the financial system. The institutions and markets that bring savers and investors together is the financial system.

13. Basics of the Financial System
The stock market is just one part of the financial system. The institutions and markets that bring savers and investors together is the financial system.
1) Financial markets are where people invest their accumulated savings, or wealth.
Some financial markets and institutions include the stock market, the bond market, and banks.

14. Basics of the Financial System
The stock market is just one part of the financial system. The institutions and markets that bring savers and investors together is the financial system.
1) Financial markets are where people invest their accumulated savings, or wealth.
2) Most investments are financial assets, meaning the buyer gets future income from the seller.
Whenever you deposit money in the bank, you are “buying” a financial asset for yourself.

15. Basics of the Financial System
The stock market is just one part of the financial system. The institutions and markets that bring savers and investors together is the financial system.
1) Financial markets are where people invest their accumulated savings, or wealth.
2) Most investments are financial assets, meaning the buyer gets future income from the seller.
3) People can also invest in physical assets, such as a house or machinery.
Another physical asset that students may be aware of is gold. During recessions and at other times, some people will buy up gold in order to sell it for a profit in the future.
When investing in physical assets, such as real estate, you can use the object however you wish, such as renting it or selling it.

16. Basics of the Financial System
The stock market is just one part of the financial system. The institutions and markets that bring savers and investors together is the financial system.
1) Financial markets are where people invest their accumulated savings, or wealth.
2) Most investments are financial assets, meaning the buyer gets future income from the seller.
3) People can also invest in physical assets, such as a house or machinery.
4) A liability is a requirement to pay someone in the future.
If you were to take a loan out from the bank to buy a new car, the loan is a liability from your point of view and an asset from the bank’s point of view.

17. Functions of the Financial System
The purpose of the financial system is to reduce transaction costs, reduce financial risk, and provide liquidity.

18. Functions of the Financial System
The purpose of the financial system is to reduce transaction costs, reduce financial risk, and provide liquidity.
1) Reduce Transaction Costs
These are the costs of negotiating and executing a legal deal.
Such costs may include paying legal fees, drawing up documents, or negotiating the terms of a deal.

19. Functions of the Financial System
The purpose of the financial system is to reduce transaction costs, reduce financial risk, and provide liquidity.
1) Reduce Transaction Costs
These are the costs of negotiating and executing a legal deal.
2) Reduce Financial Risk
People are more willing to make investments if risk is minimized.
People are generally risk-averse, meaning they prefer lower returns on a safe investment than the higher returns on a riskier investment.

20. Functions of the Financial System
The purpose of the financial system is to reduce transaction costs, reduce financial risk, and provide liquidity.
1) Reduce Transaction Costs
These are the costs of negotiating and executing a legal deal.
2) Reduce Financial Risk
People are more willing to make investments if risk is minimized.
3) Provide Liquidity
Liquid investments can be easily turned into cash without a loss. Illiquid investments cannot.
Investments must be somewhat liquid since the future is uncertain.

21. Types of Financial Assets
Financial assets have value because of a contractual agreement between two parties. (They have no physical value, like physical assets.)

22. Types of Financial Assets
Financial assets have value because of a contractual agreement between two parties. (They have no physical value, like physical assets.)
1) Bank Deposits
Includes checking, savings, and money market accounts.
Bank deposits are viewed as an asset by the depositor, and they are viewed as a liability by the bank.

23. Types of Financial Assets
Financial assets have value because of a contractual agreement between two parties. (They have no physical value, like physical assets.)
1) Bank Deposits
Includes checking, savings, and money market accounts.
2) Loans
Money given to another in return for future payment with interest.
Most loans are made by banks to individuals or to firms. Banks view loans as an asset, and the individual or firm view them as a liability.

24. Types of Financial Assets
Financial assets have value because of a contractual agreement between two parties. (They have no physical value, like physical assets.)
1) Bank Deposits
Includes checking, savings, and money market accounts.
2) Loans
Money given to another in return for future payment with interest.
3) Bonds
Bondholders loan money to a firm (or government) and are repaid with interest on a specified date.
This bond has not been filled out, but we can see that it matures 30 years from the issue date. Bonds come in a variety of denominations and interest rates.

25. Types of Financial Assets
Financial assets have value because of a contractual agreement between two parties. (They have no physical value, like physical assets.)
1) Bank Deposits
Includes checking, savings, and money market accounts.
2) Loans
Money given to another in return for future payment with interest.
3) Bonds
Bondholders loan money to a firm (or government) and are repaid with interest on a specified date.
4) Stocks
Owners of stock are referred to as shareholders. The percentage of shares of stock you own determines the percentage of assets you are entitled to.
Stockholders have part ownership of the company and its profits.

26. Financial Intermediaries
Financial intermediaries are institutions that gather together money from many people and transform those funds into financial assets.

27. Financial Intermediaries
Financial intermediaries are institutions that gather together money from many people and transform those funds into financial assets.
1) Mutual Funds
Creates a diversified financial portfolio and resells shares of the portfolio to investors.
If an individual wanted to create a diversified portfolio, it would be very difficult. Mutual funds make it possible for small investors to achieve diversification.

28. Financial Intermediaries
Financial intermediaries are institutions that gather together money from many people and transform those funds into financial assets.
1) Mutual Funds
Creates a diversified financial portfolio and resells shares of the portfolio to investors.
2) Pension Funds
Is similar to a mutual fund, and provides retirement income.
Pension funds are established by employers for their employees. They pay into it during their working years and receive money from it after retirement.

29. Financial Intermediaries
Financial intermediaries are institutions that gather together money from many people and transform those funds into financial assets.
1) Mutual Funds
Creates a diversified financial portfolio and resells shares of the portfolio to investors.
2) Pension Funds
Is similar to a mutual fund, and provides retirement income.
3) Life Insurance
Guarantees payment to a client’s beneficiaries upon death.
Because financial difficulties often arise as a result of a death in the family, life insurance policies are a great way to reduce financial risk.

30. Financial Intermediaries
Financial intermediaries are institutions that gather together money from many people and transform those funds into financial assets.
1) Mutual Funds
Creates a diversified financial portfolio and resells shares of the portfolio to investors.
2) Pension Funds
Is similar to a mutual fund, and provides retirement income.
3) Life Insurance
Guarantees payment to a client’s beneficiaries upon death.
Banks use the liquid assets of its depositors to finance the illiquid investment needs of its borrowers. Thus, money deposited in banks is lent out as loans.
4) Banks
Banks provide liquid assets and also meet investment needs.

31. The Stock Market
Remember that stock is a financial asset. Any owner of stock can hold onto or sell his/her shares of stock at any time.

32. The Stock Market
Remember that stock is a financial asset. Any owner of stock can hold onto or sell his/her shares of stock at any time.
1) A stock has value because of its ability to generate future income.
The value of financial assets is derived from their future consumption. This is different from goods and services, which are consumed in the present.

33. The Stock Market
Remember that stock is a financial asset. Any owner of stock can hold onto or sell his/her shares of stock at any time.
1) A stock has value because of its ability to generate future income.
A) The company may pay interest or dividends to its shareholders.
Many companies pay dividends to all or some of their shareholders at various times. Dividends are payouts of some of the company’s earnings.

34. The Stock Market
Remember that stock is a financial asset. Any owner of stock can hold onto or sell his/her shares of stock at any time.
1) A stock has value because of its ability to generate future income.
A) The company may pay interest or dividends to its shareholders.
B) The shareholder may sell the stock for a profit.
The goal of any investor is to buy low and sell high. When the stock market is rising, it is called a bull market. When it is falling, it is called a bear market.

35. The Stock Market
Remember that stock is a financial asset. Any owner of stock can hold onto or sell his/her shares of stock at any time.
1) A stock has value because of its ability to generate future income. D1 S1
A) The company may pay interest or dividends to its shareholders.
B) The shareholder may sell the stock for a profit. E1
2) A stock’s price is determined by expectations about the future.
Supply and demand determine equilibrium in the stock market. Shareholders who want to sell their stock “supply” it to investors who “demand” it.

36. The Stock Market
Remember that stock is a financial asset. Any owner of stock can hold onto or sell his/her shares of stock at any time.
1) A stock has value because of its ability to generate future income. D1 S1
DGood
SGood D1 S1
A) The company may pay interest or dividends to its shareholders.
EGood
B) The shareholder may sell the stock for a profit. E1
2) A stock’s price is determined by expectations about the future.
A) If expectations are good:
Allow students time to copy this graph onto the first graph on their note sheets where the heading says “If expectations are good.” Note that when demand increases and supply decreases, it can be verified that the price will increase, but the change in quantity (if there is any change) is unknown.
i) Demand increases
ii) Supply decreases
Suppose Verizon announces higher future earnings. Investors will surely want to purchase their stock, while current shareholders will be reluctant to sell.

37. The Stock Market
Remember that stock is a financial asset. Any owner of stock can hold onto or sell his/her shares of stock at any time.
1) A stock has value because of its ability to generate future income. D1 S1 D1 S1
DBad
SBad
A) The company may pay interest or dividends to its shareholders.
B) The shareholder may sell the stock for a profit. E1
2) A stock’s price is determined by expectations about the future.
EBad
A) If expectations are good:
Allow students time to copy this graph onto the second graph on their note sheets where the heading says “If expectations are bad.” Note that when demand decreases and supply increases, it can be verified that the price will decrease, but the change in quantity (if there is any change) is unknown.
i) Demand increases
ii) Supply decreases
Suppose Verizon announces bankruptcy. Investors will purchase other stocks, while current shareholders will sell in order to cut their losses.
B) If expectations are bad:
i) Demand decreases
ii) Supply increases

38. Stock Market Expectations
Current stock prices are determined by expectations about the future, but how are these expectations formed?

39. Stock Market Expectations
Current stock prices are determined by expectations about the future, but how are these expectations formed?
1) Efficient Markets Hypothesis
A) Stock prices always reflect all publicly available information.
Such information might include the changing price of a company’s inputs, the time of year, new product lines, or the strength of competition from other firms.

40. Stock Market Expectations
Current stock prices are determined by expectations about the future, but how are these expectations formed?
1) Efficient Markets Hypothesis
A) Stock prices always reflect all publicly available information.
B) Only new information changes price. Thus, the value of stock follows a random walk.
Notice how stock prices are very erratic in the short run, making them very difficult to predict. In the long run, however, the stock market consistently rises.

41. Stock Market Expectations
Current stock prices are determined by expectations about the future, but how are these expectations formed?
1) Efficient Markets Hypothesis
A) Stock prices always reflect all publicly available information.
B) Only new information changes price. Thus, the value of stock follows a random walk.
C) Thus, it is impossible to “beat the market.”
Because of the unpredictability of the future, the efficient markets hypothesis contends that no investor can consistently outsmart the stock market.

42. Stock Market Expectations
Current stock prices are determined by expectations about the future, but how are these expectations formed?
1) Efficient Markets Hypothesis
A) Stock prices always reflect all publicly available information.
B) Only new information changes price. Thus, the value of stock follows a random walk.
C) Thus, it is impossible to “beat the market.”
2) Irrational Markets
A) Many investors think stock prices are not always rational.
Stock prices decreased by one half in less than two years. Many question whether such a drop in prices accurately reflected changes in available information.

43. Stock Market Expectations
Current stock prices are determined by expectations about the future, but how are these expectations formed?
1) Efficient Markets Hypothesis
A) Stock prices always reflect all publicly available information.
B) Only new information changes price. Thus, the value of stock follows a random walk.
C) Thus, it is impossible to “beat the market.”
2) Irrational Markets
A) Many investors think stock prices are not always rational.
Warren Buffett, here seated with Barack Obama, has become a billionaire by purchasing under-priced stock and selling it later for a large profit.
B) Evidence suggests that smart investors can “beat the market.”

44. Risk and Reward DIRECTIONS
Throughout your lifetime you will likely have many opportunities to invest your money in the hopes of earning interest (or dividends). Some options will give you a guaranteed return on your investment, but the interest rate will be quite low. Others, however, will offer the chance of making a high interest rate, but the risk of losing some or all of your money will be a real possibility. Some investment options you may encounter are listed below (along with a brief explanation). Using the table, categorize each one as either a physical asset, one of the types of financial assets, or as an investment that utilizes a combination of assets.
Using the investment options from the front side, list which investments you think you will utilize during the following decades of your adult life. For each one you choose, explain why you think that particular investment will be a good choice for that time in your life.
These are the directions for the Class Activity that is included in the download, entitled “Risk and Reward.” Assign students one of the three versions. Difficulty increases from (a) to (b) to (c), allowing for differentiation, if desired. Students may either self-identify which difficulty to complete, or the teacher can decide. It works best to begin working individually with the students who have the (a) version, and then check in on the progress of the other students.

45. “The Financial System” Targets
Knowledge
Understand the importance and features of the financial system.
Reasoning
Explain how supply and demand, risk, and expectations about the future determine the interest rate (and price) for financial assets.

46. Resources
- bond note
- Dow Jones Industrial data
- Picture of Warren Buffett with Barack Obama