Dfa Case Study

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INVESTMENTS - DFA Case study Introduction Dimensional Fund Advisors, further referred to as DFA, is an investment company that bases its strategy mainly on academic research and related theories. They work together with proponents of the efficient market hypothesis, indicating a relatively strong belief in this theory and thus in efficient markets. However DFA also feels that skilled traders have the ability to contribute to a fund’s profits even when the investment is inherently passive and DFA does adjusts its strategy to new findings in the field. In this report we will evaluate the relevance and accuracy of the theories used by DFA, especially the value premium and the size premium where almost all of their funds are based…show more content…
3-18. DFA thus used findings related to the value premium and the size premium through creating several funds. DFA’s strategy is as a result of this to a great extent depended on the actual existence and persistence of both effects. Did DFA react too quickly to these still relatively controversial findings, do they fit in with the relatively strong beliefs in efficient markets by DFA and could a change in DFA’s strategy increase both the performance of its funds and the company overall? These questions will be answered by a thorough analysis of the value, and the size premium. Value premium A lot of criticism on the CAPM has arisen over the last decades. One finding by Basu in 1977 is often used by opponents of the model in order to take down the foundation of the CAPM. Basu3 found that stocks with a low price –earnings ratio, called value stocks, tend to outperform stocks with a high priceearnings ratio, named growth stocks. As the CAPM only allows for fundamental risk to explain excess returns on stocks, the finding that stocks from companies with high fundamentals (earnings, sales, dividends) relative to price outperformed growth stocks was in contradiction with the classical CAPM. Proponents of the CAPM and the efficient market argued that the value premium could be explained by their “classical” risk-and-return rewards, value stocks they argued earned higher returns due to higher risk related to poor performance in the recent history of the
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