I read that many Hindu traditions believe that a human being has the potential to be reborn as a deity by living an ethical life and building up good karma.
Can human beings be reborn as deities after living an ethical life?
Yes they can. If you are sattvic and follow dharma, you can be reborn as a deva (god). From the Manusmriti:
12.40 - Those partaking of ‘Sattva’ reach the state of the devas (gods), those endowed with ‘Rajas,’ the state of humans, and those characterised by ‘Tamas,’ the state of animals; such is the threefold migratory state.
Sacrificers, rishis (sages), devas (gods), vedas, luminaries, years, Pitṛs and Sādhyas represent the second state partaking of ‘Sattva.’