Dispersion in the context of financial management refers to the degree of variability or spread in a set of values. In the case of securities, it is often measured by the standard deviation of returns. A higher standard deviation indicates a greater dispersion of returns, which in turn implies a higher level of risk associated with the investment. According to modern portfolio theory (MPT), this volatility creates risk that is associated with the degree of dispersion of returns around the average. Therefore, a higher dispersion of returns can result in higher average returns, as investors are compensated for taking on more risk. This is why managers often find certain levels of dispersion to be optimal - it allows for the potential of higher average returns, albeit at a higher level of risk.

Choice B is incorrect. The level of dispersion does not remain constant over time. It varies based on the volatility of the market, changes in economic conditions, and other factors that influence the returns on an investment.

Choice C is incorrect. The transaction cost incurred to reduce dispersion can be significant depending on the size and frequency of transactions required to rebalance a portfolio. Therefore, it's not accurate to say that these costs are always very low.

Choice D is incorrect. Dispersion does affect average returns as it represents the risk associated with an investment. Higher dispersion indicates higher risk which could potentially lead to higher returns but also greater potential for loss.

Things to Remember

• Dispersion is often measured by the standard deviation of returns in the context of portfolio management and implies a higher level of risk associated with the investment.