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
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The two factors in Fama-French model(company size and company BE/ME)are both firm specific risk and not market related risk, and it would appear that DFA (which base a lot of their strategies on this type of academic research) is not utilizing macroeconomic variables. However, as Fama and French argued, these factors explained so much of the common variation in stocks that they essentially capture sensitivity to risk factors related to macroeconomic variables. Therefore, not directly using macroeconomic variables (which is inherently hard to find or predict), but using the size and BE/ME factor may be a better way to represent certain types of market risk. In addition, because DFA is positioned as a passive manager that adds value, its goal then would not be to beat the market, but to follow it with the belief that in the long run indices will perform better than active strategies (which may focus on designing products that addresses macroeconomic variables such as market timing, etc).
5) The efficient market enthusiasts believe that small stocks will outperform large ones, and stocks with high BE/ME will generate higher returns than stocks with low BE/ME. On the other hand, behaviorists believe that the size and value premia is not always true, and there are several variable factors need to be considered. For example, in the early 1980s, when the US went into a recession, the small companies were