Option B is correct. Dispersion refers to the variance or differences in returns among portfolios that are managed to the same strategy or mandate. Tracking error measures the active risk a manager takes against a benchmark. Over time, as a portfolio manager takes on higher active risk (greater tracking error), the potential for variations in implementation across different client accounts increases, leading to proportional increases in dispersion.

• Option A is incorrect because dual-benchmark optimization is complex and not necessarily a reliable method to reduce dispersion while achieving higher average returns.
• Option C is incorrect because dispersion is driven by both client-specific constraints (e.g., tax considerations, cash flow timing, ESG restrictions) and manager-driven factors (e.g., trade execution timing, cash drag).
• Option D is incorrect because while managers can manage and monitor dispersion, it is practically impossible to reduce it to zero due to inevitable factors like client-specific cash flows, restrictions, and differing inception dates.