the least risky is large cap growth. The most risky is
small cap value, but over the long term they even out
In other words, we all know that asset value is risk-adjusted, so that riskier assets have more potential for profit, but they are valued less in accordance with their perceived risk, since risk cuts both ways; risk is by definition the risk of loss as well as of gain; and we can expect that within an asset class, half will underperform and half will overperform; and they will balance each out.
So shouldn't an asset class like small-cap stocks as a whole (not individual stocks) have the same return as large-caps or whatever, given a long enough time frame? Otherwise, if you have a long-term investment horizon, wouldn't it make sense to invest all your money in the riskier asset classes like small-caps?
Now, we know that the market is not perfectly rational (please don't begin the standard rant about the efficient market hypothesis; we've all heard it a million times already; my question is a hypothetical), at the very least, the market can't predict the future. Is this structural unpredictability the reason why it makes sense to diversify, even with a long-term investment horizon?
BTW, this is not a homework question, I'm an individual investor interested in market theory.
