Introducing Students to Risk Diversification: Adapting a class activity to the online learning environment
Dr Michael McCann, Nottingham Trent University
Published October 2020
This case study describes an activity which introduces students to the concept of risk diversification by constructing portfolios of companies that operate in different industries. It is designed to be used in small seminars with 20 students or less. I use it at introductory level to develop students’ basic understanding of risk diversification before they develop a more technical understanding related to the correlation of returns. The exercise is intended to be active and student-centred. The students work collaboratively at (i) seminar level and (ii) smaller groups of 4-5 students on tasks to develop their understanding. Further, by using a sample of real companies in the activity, students are encouraged to research these and learn about the businesses. The sample of companies could be derived from a single country, a region or even globally, depending on the nature of the cohort. For several years, I used it in a face-to-face teaching environment. Following the increase in online teaching due to the COVID-19 pandemic, I adapted it for online delivery. I find it to be an accessible way to introduce students to the principle of portfolio diversification and it has worked well in an online seminar environment to keep students involved throughout a session.
The activity is delivered as part of an introductory finance course to first year economics students. The students tend to have no prior knowledge of finance, so they are being exposed to threshold concepts in finance for the first time. As a result, many find it a steep learning curve. Therefore, the course is intended to build students’ knowledge and understanding of finance in stages, employing a variety of activities to draw students into the subject.
The activity described here concerns the concept of business specific risk and how combining companies which do different things in a portfolio can help investors reduce their overall exposure to risk. It is intended to be an active, accessible introduction so students understand the principles underpinning portfolio diversification before developing a more technical understanding.
The activity is intended to make learning active and engaging. It has two stages which is intended to encourage participation of all the students. It takes approximately 50 minutes to deliver.
Stage 1 (approximately 20 minutes)
At this stage, the activity is delivered to the seminar group together. The purpose of stage 1 is to identify the main business of a selection of companies and be able to allocate them to the relevant industrial classification. Therefore, students are given a table with columns headed with broad Standard Industrial Classifications (SIC) such as ‘Retail’, ‘Energy’ and ‘Utilities’ and are expected to allocate announced companies to the most appropriate industrial classification. 20 companies are selected from a sample of 40 which operate across the range of industrial classifications.
For face-to-face teaching I created small cards, each with a company name written on it. I place these in a bag. A student picks one card from the bag and announces the name of the company written on the card to the class. Then, I put the card under a visualiser so the whole seminar group can see the name. I give the students a few moments to allocate the company to an industrial classification, encouraging research and discussion within the group until a classification is agreed. I think this is helpful since it fosters investigation by students and collaborative learning.
I repeat the process, going around the room so that every student has an opportunity to select a card. This process creates a buzz in the room with students anticipating their turn to pick a card, enhancing the active, shared nature of the learning experience. 20 companies are selected so in a standard seminar group of 15-20 students every student should have at least one turn.
In the online learning environment, the challenge is to recreate that active, shared learning experience. I post the document with the industrial classifications on the module’s virtual learning page which students download at the start of the activity (Download an example here). For the selection process, I created a “number wall” in a PowerPoint slide (Therefore, this needs to be presented to students in the edit screen and not as a slide presentation to allow you to delete the numbers) (Here's a downloadable version). There are 40 numbers in total and behind each number is the name of a company. I share this screen and in the online version, each student selects a number and, after I delete that number, the company name appears.
Figure 1 below shows a partially revealed “number wall.” I ask students in turn to choose a number. Therefore, students know they will be asked to choose a number, keeping their attention and producing a sense of anticipation. After each company is revealed, I give the students a few moments to allocate the company to an industrial classification. I encourage use of the chat function to facilitate the sharing of information. As in the face-to-face environment, the process is repeated until 20 companies are revealed.
Figure 1: A partially revealed ‘Number Wall’.
Stage 2 (20 minutes)
During stage 2, students are placed into small groups of four or five to agree a portfolio comprising 10 of the 20 revealed companies which they think will diversify business specific risk appropriately. For the online version, I use breakout rooms to place students in different groups. These smaller, more intimate groups encourage deeper student-centred collaboration. I want them to focus on the idea of spreading risk by creating a portfolio containing companies which do different things – represented by different industrial classifications – and therefore influenced by different factors. The groups also agree a short explanation for why their portfolio should diversify business specific risk. One student in the group takes responsibility as the scribe and another takes responsibility for reporting their portfolio and explanation.
After stage 2 the groups reconvene in a plenary session (lasting approximately 10 minutes) where they share their portfolios and explanations. This encourages peer review and discussion. They can discuss the nature of the risk diversified but also what risk may not be diversified. I tend to use a sample of UK companies which enables us to highlight systematic or market risk which is embodied in all these securities and cannot be diversified. However, since the concept of risk diversification is universal, the sample of companies can be from any country, region or indeed across the globe.
Impact and Concluding Comments
I have delivered this activity for several years in face-to-face seminars. Students report both enjoying the activity and learning a lot from it. We delivered the adapted version online during the present academic year. The online ‘game-play’ maintained active engagement and students demonstrated the anticipated learning outcomes for the activity during their ‘break-out’ discussions and plenary sessions.
It takes a bit longer to deliver the activity in the online version because you need to take a bit longer instructing students and allow more time for the selection of companies at stage 1. However, the methodical, repeated process at stage 1 allows students to gradually learn about ‘game-play’. Allocating students to breakout rooms can take time and it is important to join each room to check they understand what they are doing. We also delivered this early in the year so students were still developing familiarity with the online delivery platform we were using. Therefore, bear this in mind when planning to deliver the activity online. However, as both staff and students become more familiar with online learning, these issues should become less of a problem.