Explanation:
B is correct. Dispersion is proportional to tracking error, with the constant proportionality dependent on the number of portfolios managed by the manager.
A is incorrect. Dual-benchmark optimization can help reduce dispersion but at the expense of returns.
C is incorrect. Dispersion can be both client-driven, in which constraints placed by clients lead to differences in portfolio performance, and portfolio manager-driven, in which a lack of attention by the manager results in portfolios having different characteristics such as betas and factor exposures.
D is incorrect. Because of transaction costs, some dispersion is optimal. Managers can control dispersion but should not try to reduce it to zero.
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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.