The correct answer is C.

Dispersion in portfolio returns is caused by the differences in the holdings of each portfolio. If all portfolios have identical holdings, then the returns from all these portfolios will also be identical, eliminating any dispersion. This is because the performance of each portfolio will be influenced by the same set of assets, leading to the same returns. Therefore, identical holdings in each portfolio do not cause dispersion.

Choice A is incorrect. Different betas and factor exposures can contribute to dispersion as they reflect the sensitivity of a portfolio's returns to changes in the market or specific factors. Portfolios with different betas and factor exposures will respond differently to market movements, leading to variation in returns.

Choice B is incorrect. The number of stocks a portfolio has can also influence dispersion. Portfolios with more stocks are likely to have more diversified risk, which could lead to less variation in returns compared to portfolios with fewer stocks.

Choice D is incorrect. The overall number of portfolios under management does not directly influence the dispersion of returns among those portfolios. It's not the quantity but rather the composition and management strategy of each portfolio that contributes to dispersion.

Things to Remember

• Dispersion in portfolio returns is a measure of the variability or spread of returns among different portfolios.
• Betas and factor exposures reflect the sensitivity of a portfolio's returns to market movements and specific factors, impacting dispersion.
• Diversification plays a key role in reducing dispersion as it helps spread risk across