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Investments 35000 Dimensional Fund Advisors
The DFA case is in your course packet. You may prepare this assignment in groups (preferably 4 or less). We will discuss the case for the first half of class 8. Your group will hand in a write-up of the case addressing the questions. You do not have to answer all of the questions or answer them one by one in a list type format. What I would like instead is for you to provide a coherent write-up and recommendation which addresses these general issues. The questions I have provided are a general guideline of the issues I want you to address.
Note: There are no correct answers here. You will be graded on your ability to justify the position you take and for thoroughness in thinking about the issues, using the concepts you have learned throughout the course. For our discussion in class, you should be prepared to discuss these issues and to argue your case. I will try to confuse you and get you to fight amongst yourselves.
Address the following questions pertaining to the DFA case: Limit your responses to 5 pages total (excluding supplementary graphs or tables you wish to include).
- What do we mean by active versus passive?
- What aspects of DFAs strategy are active? What aspects are passive?
- What new clients is DFA trying to serve, and what are some of the new issues DFA will face in meeting these clients needs?
- What do efficient markets enthusiasts say about the performance of small stocks over large ones, and the performance of high book to market equity (BE/ME) or value stocks over low BE/ME or growth stocks. (e.g., how is this consistent with market efficiency?)
- How do behavioralists view the size and value premia?
- What does DFA believe?
- How does DFA manage these potential trading frictions?
- Why does DFA not utilize macroeconomic variables to explain risk and design investment products? (why do you think? Make a convincing argument as a DFA representative)
- Does this indicate that rational or behavioral explanations for size are more likely? (explain)
- Based on this evidence, should DFA abandon its small stock strategy?
- What if small stocks continue to underperform large stocks for another decade. Should DFA abandon their size strategy at that point?
- What would you tell your clients about the poor performance of the size strategy?
- What if growth continues to outperform value over the next five years. Would your answer change?
- Again, how would you explain the poor performance of the fund to your clients?
14. What future strategies would you recommend DFA pursue? Make a specific recom mendation, and justify it.
- Should they abandon/modify/maintain their current size and value strategies?
- Should they explore other interesting anomalies and adopt similar strategies?
Keep in mind DFAs objectives and beliefs when making these recommendations. Pretend you have to convince Gene Fama.
I have posted monthly returns on 25 size and BE/ME portfolios as well as the three Fama and French factors from July, 1926 to December, 2004 on my website. I have also included the monthly returns on one month treasury bills for your reference. You can use (or not use) the data in anyway you see fit. The 25 portfolios sorted on size and BE/ME represent the full spectrum of size and value sectors in the economy. The Fama-French factors represent the three-factor model designed to explain the returns associated with size and value.