Dimensional Fund Advisors Case Essay

2379 Words Mar 20th, 2011 10 Pages
Dimensional Fund Advisors Case 1. Describe the investment strategy employed by DFA. Does DFA consider itself an active or passive manager? What aspects of its strategy are active? What aspects are passive?
DFA’s investment strategy was centered on academic research, specifically on the findings of Banz’ “size effect” and Fama and French’s “book-to-market effect.” In Banz’ research, he found that small stocks consistently outperformed large stocks over the entire history of the stock market from 1926 through the late 1970s. See Exhibit 1 for overview of growth between large and small cap stocks.
In the Fama & French paper, they found that: 1) stocks with high beta did not have consistently higher returns than low-beta stocks; 2)
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Such info includes, in addition to past prices, fundamental data on the firm’s product line, quality of management, balance sheet composition, patents held, earnings forecasts, and accounting practices. The strong-form states that stock prices reflect all information relevant to the firm, even including information available only to company insiders; as was mentioned in the first paragraph, DFA does not accept this form of efficiency.
6. Does DFA believe in “fundamental analysis”? Why or why not? What other sources of value is DFA providing then?
DFA does not conduct any fundamental analysis because it believes in the semi-strong form of market efficiency. DFA will not close a transaction within a few days before a company’s earnings announcement; they avoid stocks that are likely to negatively surprise in the near future by doing a thorough investigation of a stock with news sources and company reports; and they also avoid stocks that had recently reported sales by insiders. Most importantly, DFA minimized adverse selection by paying careful attention to its seller and whether the transaction was the entire block of the stock. DFA also considered balancing two objectives: stocks with the best discounts but at the same time keep the fund maximally diversified. See also the sources of value mentioned in question 4.
7. Explain the DFA small and value stock strategies in both rational and irrational/behavioral terms. What do efficient market enthusiasts

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