Essay Dimensional Fund Advisors Case

Finally, in order to complete a more accurate comparison between the two projects, we utilized the EANPV as the deciding factor. Under current accepted financial practice, NPV is generally considered the most accurate method of predicting the performance of a potential project. The duration of the projects is different, one lasts four years and one lasts six years. To account for the variation in time frames for the projects and to further refine our selection we calculated the EANPV to compare performance on a yearly basis.

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

Dimensional uses the EMH to its advantage in coming up with its strategies. First the focus on stocks over bonds because there is a greater return on stocks. Second, they focus on several different kinds of smaller stocks instead of just one particular larger kind. The is always a risk when investing in anything. Time, relationships, and money. DFA is aware of the risks and do everything they can to make sure the best options are available to their clients. They focus on diversification of the market as a tool to reduce the risks involved. DFA uses research based portfolios that are specific to the task at hand. Its dimensional funds returned at 42% which is way above other firms in the same field.

Here we choose VW NYSE, AMEX, and NASDAQ data as market returns, because it’s value weighted and more reliable. The results show CSC’s equity beta = 2.27, QRG’s equity beta = 1.79.

Our approach is an active security selection with passive asset allocation. We invest heavily in common stocks, but vary our holdings to include companies of all sizes and industry groups. We seek to achieve sufficient diversification by abstaining from investing more than 5% of the total assets in a single security unless it has significant upside potential, and we make an exception for ETFs and index funds as they represent a basket of securities. Our main goal is to identify and invest in common stocks with high potential for both short- and long-term capital appreciation. Our secondary goal is to invest in common stocks with steady income. When potential for rewards are high, we also enter into derivative

* Stock Beta: Exhibit 5 shows a detailed measurement of the company’s stock returns in relation to the rest of the market through 5-year historical price and index data. The analysis includes monthly returns of both the NYSE and the S&P 500 index in order to capture a comprehensive view of the market return. In each comparison, the monthly returns of the Target stock and market are plotted on Y-axis and X-axis respectively to get the regression line’s slope or beta. The analysis arrives at an average beta of 0.988 which indicates a similar movement of Target stock’s returns in comparison to the whole market over time.

CAPM is a model that describes the relationship between risk and expected return, and the formula itself measures the expected return of the portfolio. Mathematically, when beta is higher, meaning the portfolio has more systematic risk (in comparison to the market portfolio), the formula yields a higher expected return for the portfolio (since it is multiplied by the risk premium and is added to the risk free interest rate). This makes sense because the portfolio needs to

As can be seen on the next table the DFA was able to save an average of 1.89% for the period (1986-2001) with improvement from year to year (average for previous 4 years was 3.79%)

The proposed business venture, Arundel Partners, is an investment group which would purchase the sequels rights associated with all films produced by 1 or more selected U.S. movie production studios for a specified period of time, or a specified number of films. As your investment analysts, our goal is to assess the value of the sequel rights to allow a determination of the value of the overall investment as well as a reasonable price-per-film for the sequel rights.

In the years since 2000, a few investors have determined that their small cap portfolio outperformed their shares held in larger companies in terms of ROI (return on investment). The total dollar price earned was lesser; nevertheless the benefit percentage was

We are providing below the assumptions and other calculations we used while computing the WACC and the cash flows.

• Higher investment returns – DFA’s strategy of purchase discounts with avoidance of adverse selection enabled it to manage a small-stock portfolio which

On the other hand, some portfolios do not represent a shareholders profit in a market. Such portfolios are not based on market capitalization. Their aim is to give a different result from what the market has. This is known as the actively managed fund strategy. Unlike the index tracker funds, the actively managed fund manager is actively involved in the market. They may be able to detect when stocks are over-priced or under-priced, hence, they may be able to pick out those stocks which yield the highest dividends and invest in them. [Monevator “the investor” (2008)].

A trust who share a common financial goal which pools the savings of a number of investors.

DFA has had a very consistent strategy since its inception in 1987. They use academic research as the backbone of their decisions. At the heart of their strategy is the efficient market theory, meaning that in liquid markets, prices reflect all available information. This is contrary to most mutual funds that attempt to continually beat the market. Instead DFA looks to academic research to invest in asset classes that historically produced higher expected returns and structure their holdings around those classes. This enables them to stay passive but add alpha over index funds. Other sources of alpha are contributed by block trading and buying in bulk at a discounted price, and finally by constructing products for niche tax advantages. Ultimately DFA is not looking to profit by exposing arbitrage in the market but instead building strategies under the assumption of fair pricing allowing them to focus their attention on investments that compensate investors for taking. Under these assumptions, the market risks come at a premium which may allow for higher expected returns. They put a strong weight on academic research and results from practicing investors that show robust long term strategies. The research behind their beliefs show that small companies have higher expected returns than large companies, high B/M “value” companies have higher expected returns than low B/M “growth” companies, and finally companies with high profitability have higher expected returns than