Under the modern prudent investor rule, what is the focus of investment strategy?

• A. Prioritizing current income above all else.
• B. Diversification for overall risk and return.
• C. Concentrating assets in a single industry.
• D. Maximizing immediate capital gains.

Answer: (B)

The key idea here is that the modern prudent investor rule looks at the portfolio as a whole and emphasizes prudent risk management through diversification. A fiduciary should not chase a single goal inside one investment (like high income, rapid gains, or concentrating everything in one industry) but should construct and manage a mix of assets so the overall risk is balanced and the potential for reasonable return is pursued across the entire portfolio. Diversification across asset classes, geographies, and strategies helps smooth risk and align investments with the beneficiaries’ objectives, time horizon, and risk tolerance.

That’s why choosing diversification for overall risk and return is the best fit. It reflects evaluating the portfolio’s total risk and potential return rather than focusing on a narrow objective. The other options miss the broader, portfolio-wide perspective: prioritizing income above all else ignores total return and risk; concentrating in one industry increases risk unnecessarily; and chasing immediate capital gains can undermine long-term, prudent management.