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Answer: A portfolio manager's tracking error and dispersion tend to be proportional to each other over time.
The correct answer is B. Dispersion is proportional to tracking error, with the constant of proportionality dependent on the number of portfolios managed by the manager. This means that as the number of portfolios increases, the dispersion and tracking error are likely to be more closely related. Option A is incorrect because while dual-benchmark optimization can reduce dispersion, it does so at the cost of potentially lower returns. Option C is incorrect because dispersion can arise not only from client-driven factors, such as specific constraints placed by clients, but also from portfolio manager-driven factors, such as differences in portfolio characteristics like betas and factor exposures due to a lack of attention by the manager. Option D is incorrect because it is not feasible or optimal to reduce dispersion to zero due to factors like transaction costs; instead, managers should aim to control dispersion to an optimal level.
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A portfolio manager is currently analyzing the variability in returns across the accounts they manage. This variability, measured as the difference between the highest and lowest returns among these accounts, is influenced by several factors. The manager is also considering strategies to minimize this variability. Which of the following conclusions can be correctly drawn from this analysis?
A
Dual-benchmark optimization can reduce dispersion and help achieve higher average returns.
B
A portfolio manager's tracking error and dispersion tend to be proportional to each other over time.
C
Dispersion is always client-driven since it refers to the variance in the performances of client portfolios managed by the same manager.
D
Portfolio managers can control dispersion and should aim to reduce any existing dispersion to zero
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