The difference in returns among portfolios is largely determined by relative exposure to the market, small cap stocks, and value stocks. Stocks offer higher expected returns than fixed income due to the higher perceived risk of being in the market. Many economists further believe that small cap and value stocks outperform large cap and growth because the market rationally discounts their prices to reflect underlying risk. The lower prices give investors greater upside as compensation for bearing this risk.
Investors who want to earn above-market returns must take higher risks in their portfolio. The cross-hair map illustrates that tilting a portfolio toward small cap and value stocks increases the exposure to risk and expected return. Decreasing this exposure relative to the market results in lower risk and lower expected return.