It's because of covariance of returns. You can construct a portfolio with the same expected return as a single stock, but with much lower expected risk, defined as variance of return. Or a portfolio with higher returns for the same risk. And so on.
Anticipating your next question, yes, in general, historical risk has a high R2 with actual risk, where risk is defined as being normalised to an index.
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It's because of covariance of returns. You can construct a portfolio with the same expected return as a single stock, but with much lower expected risk, defined as variance of return. Or a portfolio with higher returns for the same risk. And so on.
Anticipating your next question, yes, in general, historical risk has a high R2 with actual risk, where risk is defined as being normalised to an index.