“As a result of the tendency of the value fluctuations of different assets to offset one another, a portfolio’s risk is less than the weighted average of the risk of its individual holdings. A portfolio’s expected return, on the other hand, is simply a weighted average of the expected returns of the individual assets.”*

In the illustration below, we diversify the stock portion of a traditional balanced portfolio to include riskier small company and “value” asset classes. Consistent with the Prudent Investor Rule language, the result is a higher expected return with similar (or lower) risk.

See Source & Description of Data

Risk = standard deviation of annual returns

Past performance does not guarantee future returns.

* Actual language (their emphasis) from the Restatement of the Law Third: Trusts; The Prudent Investor Rule. American Law Institute, 1992.