1. Managing Your Mutual Fund
Suggested Grade and Mastery Level
Middle School – all levels
Suggested Time
Duration of the game
Project Background
This project gives SMG teams the opportunity to assume the roles of mutual fund managers.
During the trading session, teams will define the investment philosophies and goals that will
guide the selection of securities for the mutual fund portfolios they create.
Each week teams will collect, compile, and report their respective mutual fund portfolio’s
performance as if they were reporting to their investors. Early in the project it is
recommended students create a prospectus for their mutual fund. The prospectus for the
mutual fund will include the funds investment objective or philosophy, holdings, performance
using total return, selected stocks, income statements, and balance sheets.
At the end of the trading session, teams will develop their ”annual” report from the
accumulated weekly data as an authentic assessment of their mutual fund portfolio. The
mutual fund they have created can also be marketed to the class through a sales presentation
and/or Web site using information from the prospectus and annual report.
Teacher Background
According to the Dictionary of Financial Terms, “a mutual fund is a professionally managed
investment that pools the capital of thousands of investors.” Each fund has a professional
manger and an investment plan that it follows in building the portfolio. An introductory lesson
about mutual funds can be found among the core lessons of The Stock Market Game. The team
portfolios also have a section dedicated to teaching students about mutual funds.
A prospectus for a mutual fund provides a roadmap of a fund – covering everything from its
objectives and fees to the performance of portfolio holdings and manager. An annual report is
a yearly record of a publicly held company's financial condition. It includes a description of the
firm's operations, as well as balance sheet, income statement, and cash flow statement
information. The Securities and Exchange Commission (SEC) rules require that an annual report
be distributed to all shareholders. Mutual funds also issue an annual report like other
companies. Investors use both annual reports and prospectuses to gather information about the
health of a company before investing in them. An introductory lesson about annual reports can
be found among the core lessons of The Stock Market Game.
Additional information is available at
Path to Investing - http://www.pathtoinvesting.org
Yahoo! Finance – http://finance.yahoo.com
Morningstar – http://www.morningstar.com
Vocabulary:
Mutual Funds: Mutual funds are pools of money that are managed by an investment company.
Portfolio: A collection of investments.
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2. Annual Report: Yearly record of a publicly held company's financial condition. It includes a
description of the firm's operations, as well as balance sheet, income statement, and cash flow
statement information. SEC rules require that it be distributed to all shareholders.
Prospectus: The prospectus of a mutual fund provides a roadmap of a fund – covering
everything from its objective and fees to its performance and manager.
Securities and Exchange Commission (SEC): A federal agency that regulates the U.S. financial
markets. The SEC also oversees the securities industry and promotes full disclosure in order to
protect the investing public against malpractice in the securities markets.
Philosophy: The philosophy of doing business describes your investment objectives.
Investment objectives fit into one of three basic goals: income, income and growth, or growth.
The risk factor is also a component of the investment objective.
Holdings: A list of stocks currently owned by the mutual fund.
Performance: Whether the fund is meeting your investment goal. The most accurate measure
of a mutual fund’s past and current performance is its total return, or its increase in value plus
its reinvested distributions.
Income Statement: A financial summary of the revenues and expenses of a company during an
accounting period.
Balance Sheet: A financial report showing the status of a company’s assets, liabilities, and
owners’ equity on a given date.
Performance Objectives:
Students will be able to:
Define and demonstrate comprehension of the following terms: mutual funds,
portfolio, annual report, prospectus, SEC, philosophy, holdings, performance,
income statement, balance sheet.
Collect and organize data to include in the prospectus and/or annual report.
Summarize data in letter, chart and graph form.
Calculate performance using total return.
Evaluate data to determine if investment objectives and philosophy were met.
Write an explanation of performance and fund strategy.
Create and explain an prospectus and/or annual report for their mutual fund.
Subject Area
Economics, Business, Social Studies, Math, English / Language Arts
Materials
Registered teams with The Stock Market Game.
Computers with spreadsheet and word processing programs.
Computers with Internet access.
An annual report from a mutual fund company or view a copy from the Internet.
Team journals
Activity Sheets
Springboard Activity
Ask each student in the class to give $0.50 to purchase supplies for a class party. The class
selects four students to make the purchasing decisions. Only students who mutually funded the
party receive the goods purchased. If the four students managing the money don’t spend it
wisely or lose all the money we will not have much of a party
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3. Explain this is how a mutual fund works. People with similar investing objectives give money
to a group of individuals called mutual fund managers who are hired to invest the funds on
behalf of the group. The earnings from the investments are distributed back to the people who
mutually funded it. The more money the mutual fund makes the more the individual investors
make.
Now have SMG teams login to their portfolios and click on the Mutual Funds tab. Each team
should research the characteristics of mutual funds and compare and contrast the stock
selections of two funds. Each team should then generate a list of ideas for creating their own
mutual fund.
Activities
Creating a Prospectus
Ask:
Based on the your research about mutual funds and your initial experience in the
SMG, what would you want to know as an investor before you gave money to a
mutual fund manager? Would you want to know about the investment objectives,
performance, and/or financial statements?
How would this information be communicated to potential investors?
To begin their prospectus, have students write a summary on what their team has agreed on as
a management philosophy. This philosophy should consider:
What is you investment objective? Provide income, some income and growth, or future
growth.
What is your risk factor? Conservative, moderate, or speculative?
After agreeing on a management philosophy, teams need to name their fund. The name should
reflects their philosophy. Teams should list the stocks or types of stock they plan to invest in.
Their list should include a description of how their chosen stocks are performing at present.
This could be done on a spreadsheet along with a pie chart, illustrating the team’s investment
strategy. Teams should present this information in a pamphlet intended for potential
investors. The pamphlet might also include the management fees they would charge.
Additional mutual fund resources are available at
Path to Investing - http://www.pathtoinvesting.org
Yahoo! Finance – http://finance.yahoo.com
Morningstar – http://www.morningstar.com
Managing the Fund
Each week of the SMG trading session:
Divide students into their SMG teams.
Teams should print the current week’s transaction history.
Teams should record their meeting minutes in their team journals.
Teams should address the following questions in their team journals:
How well is your mutual fund portfolio performing? Are you doing better or worse than
the Dow? S & P? Other similar mutual funds? (Maybe you want to include some graphs
or charts)
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4. Is your portfolio following the objectives of your mutual fund? Do you need to make
changes? If so, what changes are you going to make and why?
Are there current events affecting the performance of your stocks? To what extent
should you be considering the impact of these world and national events in the stock
selection for this mutual fund portfolio?
Risk vs. Reward
Have teams complete Activity Sheet 1. Teams should also print the Transaction History page
of their portfolio and compile a list of the top ten companies in their Account Holdings in
descending order from largest to smallest. They will create a chart and graph of their portfolio
holdings.
Calculating Total Return
Have teams complete Activity Sheet 2.
Ask:
Which funds would have been acceptable if the overall market had increased by 6%
over the same time period? Why or why not?
Have students calculate past performance by calculating the total return of their investments
Creating Financial Statements
Have teams complete Activity Sheet 3. Afterwards, direct them to Yahoo! Finance and have
them enter the stock symbol they selected. Once the quote and information page for their
company loads, teams should click on income statement and balance sheet links on the left-
hand side of the page.
Have each team chose two of the stocks in their portfolio and create a three-year analysis of
the income statement and balance sheet.
Designing an Annual Report Cover
Have teams review and critique different covers of annual reports. Annual Reports.com is a
good resource for this activity: http://www.annualreports.com.
Ask:
What messages do the covers convey about the company? Are they accurate
What images would portray a conservative/income fund?
What images would portray an aggressive/growth fund?
Have students design a cover for their mutual fund. Their design should accurately portray
their investment philosophy. Afterwards, teams should write a summary to their shareholders
with their final performance and holdings. Include a summary of why decisions were made to
buy or sell stocks and any changes that would be made to the fund in the future.
Authentic Assessments
Annual Report
Use the Annual Report Rubric to create an annual report for your mutual fund. Teams should
prepare a sales presentation or website to market their mutual fund based on the annual
report.
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5. Letter to Distraught Investor
Inform your teams that their investors are complaining about the yields on their mutual fund
portfolios. Have them prepare a plan to improve short-term gains so they can produce profits
for the next quarter. Teams should also write a letter to investors sharing the new mutual fund
investment strategy
Starting Fresh
Have teams decide what approach they would take if they had a chance to start over with a
new portfolio. Students should include changes in philosophy as well as direct references to key
buying decisions for their portfolios.
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© 2006 Foundation for Investor Education. All Rights Reserved.

6. Activity Sheet 1: Risk vs. Reward
The following chart shows how as investment risk increases so does the reward.
The lower the investment risk, the lower the investment reward is.
Junk Bonds
High Risk Commodities High Risk
High Return Art, Metals High Return
Futures, Options
Aggressive Mutual Funds
Small Cap Funds
Growth Stock
Growth Mutual Funds
Moderate Risk Rental Property Moderate Risk
Moderate Return Index Funds Moderate Return
Growth and Income Funds
Balanced Mutual Funds
Municipal Bonds
U.S. Gov. Notes and Bonds
Utility Stocks
Convertible Bonds
Low Risk Treasury Bills Low Risk
Low Return Money Market Low Return
Certificate of Deposit
Using Yahoo! Finance as a resource, put the following investments in order from
highest risk to lowest risk:
Pork Bellies Nations Bank 1yr CD Bond BB- Rating Duplex
Citibank Money Market GE common stock New York Gas and Electric Stock FDSCX
JORNX UPS stock option American Balanced Fund Treasury Note
U.S. Treasury Bill Prudential Convertible Chicago City Bond Gold
Bond
KNIPX AVEIX The Income Fund of America
© 2006 Foundation for Investor Education. All Rights Reserved.

7. Activity Sheet 1 Answer Key
Junk Bonds Bond BB- Rating
High Risk Commodities High Risk Pork Bellies
High Return Art, Metals High Return Gold
Futures, Options UPS stock option
Aggressive Mutual Funds AVEIX
Small Cap Funds FDSCX
Growth Stock GE common stock
Growth Mutual Funds JORNX
Moderate Risk Rental Property Moderate Risk Duplex
Moderate Return Index Funds Moderate Return KNIPX
The Income Fund of
Growth and Income Funds America
American Balanced
Balanced Mutual Funds Fund
Municipal Bonds Chicago City Bond
U.S. Gov. Notes and Bonds Treasury Note
New York Gas and
Utility Stocks Electric Stock
Prudential Convertible
Convertible Bonds Bond
Low Risk Treasury Bills Low Risk U.S. Treasury Bill
Low Return Money Market Low Return Citibank Money Market
Certificate of Deposit Nations Bank 1yr CD
© 2006 Foundation for Investor Education. All Rights Reserved.

8. Activity Sheet 2: Calculating Percentage Returns
The most accurate measure of a mutual fund’s past and current performance is
its percentage of return, or its increase in value plus its reinvested distributions.
Change in value + dividends
----------------------------------------------- x 100 = Percentage Return (%)
Cost of initial investment
For example, an $8,000 investment with a one-year total return of $1,250 ($1,000
increase in value plus $250 in reinvested distributions) has an annual percentage
return of 15.6%
$1,250
------------ x 100= 15.6%
$8,000
Calculate the total return for the following problems:
Mutual Fund Name Initial Investment Change in value Dividends Percentage Return
Fidelity Growth Fund $10,000.00 $1,700.00 $100.00
Janice Bond Fund $55,000.00 $5,000.00 $300.00
American Small Cap Fund $30,000.00 -$1,500.00 $400.00
Aim Income Fund $25,000.00 $400.00 $0.00
Vanguard Index Fund $40,000.00 $6,000.00 $270.00
USB Large Cap Fund $15,000.00 $5,000.00 $400.00
Met Life Aggressive Fund $8,000.00 $900.00 $100.00
© 2006 Foundation for Investor Education. All Rights Reserved.

9. Activity Sheet 2 Answer Key
Mutual Fund Name Initial Investment Change in value Dividends Total Return
Fidelity Growth Fund $10,000.00 $1,700.00 $100.00 18.00%
Janice Bond Fund $55,000.00 $5,000.00 $300.00 9.64%
American Small Cap Fund $30,000.00 -$1,500.00 $400.00 -3.67%
Aim Income Fund $25,000.00 $400.00 $0.00 1.60%
Vanguard Index Fund $40,000.00 $6,000.00 $270.00 15.68%
USB Large Cap Fund $15,000.00 $5,000.00 $400.00 36.00%
Met Life Aggressive Fund $8,000.00 $900.00 $100.00 12.50%
© 2006 Foundation for Investor Education. All Rights Reserved.

10. Activity Sheet 3: Financial Statements
Microsoft Corporation
Income Statement
PERIOD ENDING 30-Jun-05 30-Jun-04 30-Jun-03
Total Revenue 39,788,000 36,835,000 32,187,000
Cost of Revenue 6,200,000 6,716,000 5,686,000
Gross Profit 33,588,000 30,119,000 26,501,000
Operating Expenses
Research Development 6,184,000 7,779,000 4,659,000
Selling General and
Administrative 12,843,000 13,306,000 8,625,000
Total Operating
Expenses 19,027,000 21,085,000 13,284,000
Operating Income or Loss 14,561,000 9,034,000 13,217,000
Income from Continuing Operations
Total Other
Income/Expenses Net 2,067,000 3,162,000 1,509,000
Earnings Before
Interest And Taxes 16,628,000 12,196,000 14,726,000
Income Before Tax 16,628,000 12,196,000 14,726,000
Income Tax Expense 4,374,000 4,028,000 4,733,000
Net Income From
Continuing Ops 12,254,000 8,168,000 9,993,000
Net Income 12,254,000 8,168,000 9,993,000
Income Statement Questions:
1. What is the total revenue Microsoft earned in 2005?
2. What is the total expense Microsoft earned in 2004?
3. Is the three-year revenue trend favorable for Microsoft? Why?
4. Is the three-year net income trend favorable for Microsoft? Why?
© 2006 Foundation for Investor Education. All Rights Reserved.

11. Microsoft
Balance Sheet
PERIOD ENDING 30-Jun-05 30-Jun-04 30-Jun-03
Assets
Current Assets
Cash And Cash
Equivalents 4,851,000 15,982,000 6,438,000
Short Term
Investments 32,900,000 44,610,000 42,610,000
Net Receivables 8,881,000 7,987,000 7,702,000
Inventory 491,000 421,000 640,000
Other Current Assets 1,614,000 1,566,000 1,583,000
Total Current Assets 48,737,000 70,566,000 58,973,000
Long Term Investments 11,004,000 12,210,000 13,692,000
Property Plant and Equipment 2,346,000 2,326,000 2,223,000
Goodwill 3,309,000 3,115,000 3,128,000
Intangible Assets 499,000 569,000 384,000
Accumulated Amortization - - -
Other Assets 1,299,000 1,774,000 1,171,000
Deferred Long Term Asset Charges 3,621,000 1,829,000 -
Total Assets 70,815,000 92,389,000 79,571,000
Liabilities
Current Liabilities
Accounts Payable 5,768,000 6,534,000 5,033,000
Other Current
Liabilities 11,109,000 8,435,000 8,941,000
Total Current Liabilities 16,877,000 14,969,000 13,974,000
Long Term Debt - - -
Other Liabilities 4,158,000 2,595,000 2,846,000
Deferred Long Term Liability Charges 1,665,000 - 1,731,000
Total Liabilities 22,700,000 17,564,000 18,551,000
Stockholders' Equity
Common Stock 60,413,000 56,396,000 35,344,000
Retained Earnings -12,298,000 18,429,000 25,676,000
Total Stockholder Equity 48,115,000 74,825,000 61,020,000
Net Tangible Assets $44,307,000 $71,141,000 $57,508,000
© 2006 Foundation for Investor Education. All Rights Reserved.

12. Balance Sheet Questions:
1. Is the three-year trend for total liabilities favorable for Microsoft? Why?
2. Is the three-year trend for total assets favorable for Microsoft? Why?
3. What is the current ratio for 2005? Is that above or below the industry
average?
4. What is the quick ratio for 2005? Is that above or below the industry
average?
© 2006 Foundation for Investor Education. All Rights Reserved.

13. Income Statement and Balance Sheet Answer Key
Income Statement Questions:
What is the total revenue Microsoft $39,788,000
earned in 2005?
What is the total expense Microsoft $21,085,000
earned in 2004?
Is the three-year revenue trend Yes, it has increased for the last two
favorable for Microsoft? Why? years 8% and 14%
Is the three-year net income trend It increased 50% last year but
favorable for Microsoft? Why? decreased 18% in 2004
Balance Sheet Questions:
Is the three-year trend for total liabilities No, liabilities increased $5,135,000 last
favorable for Microsoft? Why? year after decreasing $987,000 the
year before.
Is the three-year trend for total assets No, total assets decreased
favorable for Microsoft? Why? $21,574,000 last year after increasing
$12,818,000 the year before.
What is the current ratio for 2005? Is 2.89 to 1, this is above the industry
that above or below the industry standard of 2 to 1.
average?
What is the quick ratio for 2005? Is 2.76 to 1, this is above the industry
that above or below the industry standard of 1 to 1.
average?
© 2006 Foundation for Investor Education. All Rights Reserved.

14. Students Name
Annual Report Rubric
Project Requirements Exceeded Requirements Met Requirements Needs Work to Meet Requirements
Demonstrates vocabulary comprehension
Summary of management philosophy
Collects and organizes data which include:
a. Transaction history for duration of game
b. List of top ten account holdings
c. Chart and graph of holdings
Calculates performance using total return
Letter explaining how well Investment objectives
and philosophy have been met
Optional:
a.Chart of past three-year stock performance
of major holdings
b. Annual report cover
© 2006 Foundation for Investor Education. All Rights Reserved.