We examine the impact of director diversity on corporate policies and risk. Using a multi-dimensional diversity index, we find that board diversity leads to significantly lower realized return volatility. This is largely due to diverse boards adopting less risky financial policies. However, consistent with diversity fostering more efficient (real) risk-taking, firms with greater board diversity invest more in R&D and produce more and better innovation. Although diversity is associated with higher board frictions, performance tests indicate that the gains from diversity outweigh the costs. Instrumental variable tests that exploit exogenous variation in firm access to the supply of diverse nonlocal directors indicate that these relations are causal.