Diversify Your Portfolio and Reduce Your Risks

One of the key elements of modern portfolio theory is diversification. Investors can reduce their exposure to risk by holding a diversified portfolio of assets. By investing in a combination of assets which are not perfectly correlated, an investor can earn the same portfolio return with much less risk.

In addition to diversifying among different asset classes, such as stocks, bonds, and savings accounts, an investor can reduce risk by diversifying within asset classes. Owning a variety of stocks reduces the effect on a portfolio of any one stock dropping in value.

Prosper offers a new asset class, consumer loans, enabling you to diversify your investment portfolio. We have also made it easy to lower your risk within your portfolio of Prosper Notes. You can invest as little as $25 in any one loan, greatly reducing the impact of any one borrower going into default.

You can use our tools and data to make intelligent bidding decisions. You can find online borrower listings that meet your criteria for risk and return. You can then bid in small increments, and build a large portfolio of Notes. The volatility of returns can be reduced by investing in a large number of small loans rather than a small number of larger loans.

We have analyzed the historical returns of lenders with different strategies and learned that bidding small amounts on many loans has generally produced a higher return than bidding higher amounts on certain listings. A lender can achieve the same return with much lower volatility by spreading his investment across a larger number of loans. So a portfolio of several small loans may be a good idea, because it spreads your risk across more borrowers, reducing the impact of any one default.

Hypothetical Lender Return Analysis

Below is hypothetical lender return data, comparing the probable returns for two bidding strategies. Both hypothetical lenders invest $7,500 at a 23% lender rate, with a final loss rate of 10% after all loans were paid in full. One hypothetical lender bid on only 5 loans, while the other diversified across 150 different loans. Remember that investing on Prosper is risk-bearing and speculative and positive returns are not guaranteed, even with a diversified lending strategy.

The Notes that correspond to specific borrower listings are offered pursuant to the prospectus. Investors should read the complete description of the Notes and risks associated with making an investment in the Notes as well as other information about us and our platform in the prospectus.