Final answer:
Investment choices such as bank accounts, bonds, and stocks each have different levels of risk and potential return, establishing a risk-return tradeoff. Diligent monitoring of a portfolio and staying informed usually results in better investment performance.
Step-by-step explanation:
When choosing an investment, considering the tradeoff between expected return and risk is crucial. Bank accounts, for example, offer very low risk but also provide very low returns. In contrast, bonds carry a higher risk, delivering potentially higher returns. Stocks represent the riskiest option but have the potential for the highest returns. This is because the higher average return is seen as compensation for taking on more risk. For the scenario with you and your friend investing using E-Trade, diligent monitoring of investments and staying informed about financial news greatly influence portfolio performance. Your portfolio, with careful selection and monitoring, is more likely to adapt to market changes and potentially yield better results. On the other hand, your friend's portfolio, chosen randomly and without attention to changing market conditions, could underperform due to a lack of informed decision-making. Mutual funds, managed by professionals, are another option that offers diversification, spread across stocks and bonds, potentially mitigating risk while providing a balanced return. To purchase stocks, one can use online platforms like E-Trade or consult with brokers. Diversifying your portfolio is important to spread the risk across different asset classes, reducing the impact of any single investment's poor performance.