Dimensional Fund Advisors

2099 WordsApr 12, 20139 Pages
Dimensional Fund Advisors 2002 Introduction: Dimensional Fund Advisors (DFA) is an investment firm based in Santa Monica, California. It was founded in 1981 by David Booth and Rex Sinquefield. It is a different investment firm which think differently and push the frontiers of innovation. The firm had close working relationships with academics such as Eugene Fama and Kenneth French who introduced the Fama & French three factors model. Fama has worked in DFA since very early days, now he is the director of research department of DFA. He is known for his work on portfolios and asset pricing. This report is going to discuss the business strategy of DFA, issues relating to Fama & French Three Factor Model such as variables being used…show more content…
This model is an expansion of the CAPM and it includes two additional variables, taking into account size and book to market factors, as explanatory variables expressed within the model as SMB and HML. The Capital Asset Pricing Model (CAPM) and Fama & French’s three factors model are both models account for the expected returns for stock albeit using different variables to distinguish and add reliability to the predictions of these estimated returns. However, the CAPM uses only one factor to determine the riskiness of the marketplace, Beta, whereas Fama & French expands on this model, incorporate another two factors to establish the risk, Small minus Big (SMB) and High Minus Low (HML), which take into account the relationships between market and share size. Hence, in Fama & French’s findings, stocks with higher beta did not always perform better. The Three Factor Model is indeed preferred at predicting the returns of stocks, in correlation with each models risk factor. Moreover, although small stocks outperform large stocks in the past several years, we should not expect small stocks to outperform large stocks in the future, because, in the future stock market, there’re quite a lot uncertainty, either, we might find the situation that a small stock can only outperform a large stock in a specific period (i.e. government may promote some specific industry) or it contains

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