Under which rule must a trustee diversify investments to spread risk of loss?

Under which rule must a trustee diversify investments to spread risk of loss?

• A. TRUSTEE LOYALTY
• B. TRUSTEE SELF-DEALING
• C. PRUDENT INVESTOR RULE
• D. TRUSTEE DIVERSIFY

Answer: (C)

The Prudent Investor Rule requires a trustee to manage trust assets with care and good judgment, treating the portfolio as a whole rather than judging each investment in isolation. Diversification is a core tool under this standard because spreading investments across different asset types, geographies, and strategies reduces the overall risk of loss while aiming for a reasonable return. The rule reflects modern portfolio thinking: a trustee meets the duty of prudence not by chasing the best single investment, but by balancing risk and reward across the entire trust portfolio, aligned with the trust’s goals, time horizon, and beneficiaries. Other duties mentioned focus on different fiduciary obligations. Loyalty is about avoiding conflicts of interest and prioritizing beneficiaries’ interests; self-dealing forbids personal gain at the trust’s expense. There isn’t a stand-alone rule named “trustee diversify” that mandates diversification regardless of context. Since diversification is explicitly part of prudent investment management, the correct rule is the Prudent Investor Rule.

The Prudent Investor Rule requires a trustee to manage trust assets with care and good judgment, treating the portfolio as a whole rather than judging each investment in isolation. Diversification is a core tool under this standard because spreading investments across different asset types, geographies, and strategies reduces the overall risk of loss while aiming for a reasonable return. The rule reflects modern portfolio thinking: a trustee meets the duty of prudence not by chasing the best single investment, but by balancing risk and reward across the entire trust portfolio, aligned with the trust’s goals, time horizon, and beneficiaries.

Other duties mentioned focus on different fiduciary obligations. Loyalty is about avoiding conflicts of interest and prioritizing beneficiaries’ interests; self-dealing forbids personal gain at the trust’s expense. There isn’t a stand-alone rule named “trustee diversify” that mandates diversification regardless of context. Since diversification is explicitly part of prudent investment management, the correct rule is the Prudent Investor Rule.