Dimensional Fund Case Study

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Dimensional Fund CASE REPORT DFA’s strategy was to provide the market with a smarter set of index funds. DFA believed deeply in market efficiency, and as such drew the conclusion that the current market price of a stock contained all the available information. They did, however, believe that studying the markets historically and academically was important. Also, they believed they could add even more value by having top traders and a top trading strategy. Some principles of DFA are as follows: 1. No one had the ability to consistently pick stocks that would beat the market. Such beliefs were associated with proponents of index funds. 2. Do sound academic research. 3. Pay attention to the ability of skilled traders to contribute to a fund’s profits even when the investment was inherently passive. Based on these principles, and the past performance of the DFA funds, we conclude that the firm is highly efficient at executing their particular business plan. From the Fama-French findings, we get the conception that the “beta” does not work that well in CAPM. CAPM, the traditional asset-pricing model, uses only one variable, beta, to describe the returns of a portfolio or stock with the returns of the market as a whole. Moreover, Fama and French observed that two classes of stocks have tended to do better than the market as a whole :one is a small cap and the other is stocks with a high book-to-market ratio. In conclusion, they then added two factors to CAPM to reflect a portfolio's exposure to these two classes. As far as I am concerned, in some degree, the results really make sense for the market as they concede that the model related to real economic risk. Through the study and analysis of the historical data, people found that Fama-French’s findings have great ability to explain the solid performance of value stocks. In my opinion, I hold the view that

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