Dfa - Dimensional Fund Advisors Essay
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