DFA roughly believed in efficient market theory. They believed that the high return of small stocks and value stocks come from high risk which matched the efficient market theory. Moreover, they would not do any fundamental analysis of the firm in question. (p6) At the same time, however, they did some adjustments based on other two principles, sound academic researches and skilled traders, to get rid of those not matching the theory. For example, they did not purchase those stocks with inside trade information.
These findings were published in a 1992 paper titled "The Cross-Section of Expected Stock Returns". 2. DFA's business strategy centers on the core concept that markets are "efficient" that is that no one has the ability to consistently pick stocks that would beat the market. In addition, the founders of DFA believed that combining solid academic research with the abilities of skilled traders would complement each other to produce superior returns. DFA's Small Cap objective is to deliver the size effect (research has indicated that small companies provide higher expected returns than larger companies in the long term) and provide the diversification benefits of investing in small companies worldwide.
Eugene Fama and Robert Shiller of Asset Bubbles Analysis Eugene Fama is known for his development of the famous efficient-market hypothesis. According to the EMH, investors are rational and prices would reflect information investors receive. Fama himself even denied the existence of economic bubbles. Robert Shiller on the other hand has been known for his study of behavioral finance and the prediction of the dot-com bubble. There seems to be no agreements Shiller and Fama can have the subject of asset bubbles since the two have different opinions on how the market behaves.
- To be the preferred provider. Strategies to achieve the above mentioned goals: 1) Invest in projects that increase shareholders values : This object is one of the financial goals to invest properly. Marriott used discounted cash flow techniques to evaluate potential investment. It is beneficial because it is considered present time value. Projects which increase shareholder value could be formed with benchmark hurdle rates, the company can ensure a return on projects which results in profitable and competitive advantage.
As mentioned previously, Adam Smith, a highly regarded economist, demanded that in order for economic success, the”invisible hand of the market” must be in control, rather than the government. This notion involves the establishment of free enterprise and greater openness to international trade and investment (e.g the abolition of tariffs). Free enterprise results in the value of various goods and services being determined by supply and demand meaning that suppliers are unable to manipulate prices. It also encourages investment as people can see the potential to make a return – without the government capping prices. On the other hand, this idea of free trade is highly disadvantageous, and even harmful, to the Global South with the Global North dictating prices.
DFA is a firm believer in efficient markets. DFA is built around the theories of Fama and French, who are advocates of EMH that see high returns as a reward for taking on high risk. In their paper “luck versus skill in the cross section of mutual fund returns” (2009), they found that active management is always a zero sum game thru the idea of equilibrium accounting. They concluded that passive investing is more relevant. DFA believes in the value of sound academic research and the exceptional skills of traders in adding values into DFA seemingly passive funds.
Alex Thomas Macroeconomics What are the costs and benefits of economic growth to a developing country? In recent years many countries, such as Brazil, India and china are rapidly developing and are experiencing a very high level of economic growth, while economic growth has its many benefits, to both the government and the general population, it also has several considerable negative impacts in the long term, which could lead to an unstable economy in the future if it is mismanaged. One example of how economic growth can benefit the economy is that living standards generally improve, this is because when an economy encounters rapid growth, there is a significant increase in the amount of services and goods produced, therefore the average standard of living will increase. As an economy grows, the average annual earnings increases, for an example India’s annual growth in real GDP in 2000 was only 5.5%, and by 2010 it was 10.4%. As well as increasing living standards, it also benefits the government, as they will see an increase in revenue collected in income tax.
Everything being equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC means a decrease in valuation and a higher risk. A firms WACC is a very important both to the stock market for stock valuation purposes and to the company's management for capital budgeting purposes. In an analysis of a potential investment by the company, investment projects that have an expected return that is greater than the company's WACC will generate additional free cash flow and create positive NPV for stockholders. Since the WACC is the minimum rate of return required, the managers in the company should invest in the projects that generate returns in excess of the WACC. WACC is set by the investors (or markets), not by managers.
With modern facilities it is possible to extend the theoretically given efficient frontier of a supply chain (Chopra/Meindl, 2007, pp. 44-45) and to achieve additional “supply chain surplus”, which at the end is supporting strongly the company’s financial performance. 2. Inventory During 2006 Rolls-Royce raised its inventory with the clear intention to increase the responsiveness of its supply chain (growth in output; stock for aftermarket support; stocks of rare raw materials). A higher inventory always means to have some financial capital bounded.
4) Market share * Designed to increase or maintain market share regardless of fluctuations in industry sales. Market share objectives are often used in the maturity stage of the product life cycle. 5) Cash Flow * Designed to maximize the recovery of cash as quickly as possible. This objective is useful when a firm has a cash emergency or when the product life cycle is expected to be quite short. 6) Competitive Matching * Designed to match or beat competitor's prices.