Dfa - Dimensional Fund Advisors Essay

2240 Words Oct 8th, 2010 9 Pages
Would you invest in DFA? Yes due to steady returns provided by the company and as investors are generally past performance chasers, one has no reason not to invest in DFA. The company was founded on a sound investment style based on its core belief in sound academic research, passive fund management. Until almost the end of the 20th century DFA had found a way to make money actively with a passive investment strategy. But looking forward, according to me it needs to evolve with the times and look for questions regarding its own strategy and its evolution with the times and the questions facing the financial future. As highlighted by the boom in the I.T sector towards the end of the last century that DFA missed out on …show more content…
Because of the diversified nature of their funds i.e lower risks and higher returns that the funds experienced over the last years make DFA a value for money. DFA has a competitive advantage and is a market leader in small cap stocks investing segment while keeping the transaction costs low. DFA managed funds yielded steady returns over the decades for its clients.
Note: numbers from Exhibit 8 for past returns a. How did they convert the notion of market efficiency and conclusions from optimal portfolio theory into a business?

DFA rejects stock-picking, market timing and utilizes enhanced indexing to design portfolios and limit trading costs by a passive investment strategy . To reduce risk of its funds, DFA diversified the portfolio of the fund as much as possible until the stocks fit the DFA criteria. DFA believes in market efficiency and used Fama and French (FF) three factor model as an alternative explanation for the ongoing arguments on asset pricing. These included stocks with small market capitalization and stocks with high book to price (market value). Since these stocks yielded higher return than market, FF commented that such phenomenon is explained by the existence of size as well as value premium in addition to the market risk premium as posited by traditional CAPM.

B. Value/Size premium What is the value and size premium? How much is the size premium? Any trend? What could be the cause? How much is

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