Dimensional Fund Advisors Case Analysis Essay

1337 Words Jan 24th, 2013 6 Pages
1) DFA’s investment strategy is based on their belief in the principle that stock market is efficient. They attempt to match a broad-based, value-weighted small-stock index and position themselves in the market as a passive fund manager that still claimed to add value by capturing specific dimensions of risks identified by financial science. DFA’s investment strategy incorporates elements of both passive and active management. It is passive in the sense that like many other index managers, it focuses on the importance of diversification, lower turnover and lower fees than actively managed portfolios. It is active in the sense that it develops its small-value stock focus based on academic research and uses certain techniques (such as …show more content…
DFA’s trading strategy such as avoiding stocks if news announcements are coming in the near future or if stock has recently reported sales by insiders reflect a belief that stock prices can potentially not reflect all private information. DFA also does not accept the weak-form efficient because if stock prices only reflect all information in past prices, they would see the value of performance fundamental analysis of the firm they are looking at (but the case indicates that DFA does not performance fundamental analysis).

4) Fama and French’s three factor model attempts to explain the variation of stock prices through a multifactor model that includes a size factor and BE/ME factor in addition to the beta risk factor. Fama-French model essentially extended the CAPM (which breaks up cause of variation of stock price into systematic risk which is non-diversifiable and idiosyncratic risk which is diversifiable) by introducing these two additional factors. Fama and French find that stocks with high beta didn’t have consistently higher returns than stocks with low beta and this indicates that beta was not a useful measure under their model. Their model is based on research findings that sensitivity of movements of the size and BE/ME factor constituted risk, and
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