Hi J,
"If I understand the academic studies properly, risk is lowered AND returns are slightly better."
Yes, that can be the case. MPT tries to create portfolios that maximize returns for a given risk level or minimize risk for a given return (basically the same thing viewed from two different perspectives).
So if you have a non-diversified portfolio, that has risk X and returns Y, then it's quite possible that a properly diversified portfolio can give you X' and Y' where X' < X and Y' > Y.
"It seems counter-intuitive that a more conservative scheme produces better results but that seems to be the case."
Very well said. Much like quantum mechanics, this concept is not naturally grasped by our minds. It appears to go against common sense. However it has been proven over and over again to hold true.
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