Final answer:
To select a portfolio from six alternatives, investors must analyze risk and return, evaluate investment objectives and constraints, consider time horizon and liquidity needs, assess diversification benefits, and review historical performance. The correct process includes all of the mentioned steps, and decisions should be based on personal risk tolerance and the potential for returns over various time frames.
Step-by-step explanation:
When selecting a portfolio from six alternatives, investors need to consider several important steps. Analyze the risk and return of each alternative to understand the potential gains or losses associated with the investments. Next, evaluate the investment objectives and constraints, which include personal goals and limitations related to the investment. Investors should also consider the time horizon and liquidity needs, evaluating how long they intend to hold the investments and how quickly they may need to convert assets into cash.
Moreover, it is essential to assess the diversification benefits, which can help minimize overall risk by spreading investments across different asset types. Reviewing the historical performance is also beneficial, although past performance is not always indicative of future results. Therefore, the correct answer to the student's question is all of the above, as each step is part of a comprehensive investment strategy.
Questions such as How do you assess risk before making an investment? and What types of accounts are offered to consumers? What are the costs associated with these accounts? also highlight the importance of understanding the different facets of investing before making decisions. It is crucial to acknowledge the tradeoff between return and risk, which is a fundamental consideration in any investment decision. Investors should base decisions on personal risk tolerance and the need for potential returns, which often vary based on different time frames.