List the factors Used in DFA’s Equity model and highlight some of the academic research behind these factors. Why does DFA expect those factors to work?
DFA considered the factors that would affect the investment and their expected return generated in the market. The firm invested in two portfolio namely SMB (small-minus-big) and HML (High-minus-low). Where SMB held small stocks and HML held value stocks. Furthermore, the firm considered that factors based on the academic research conducted by Fama and French, through which, they created Asset pricing model or equity model. It was evaluated through this model that, value and small stocks outperformed in the market, compared to others. More specially, it was determined that small stocks outperformed large ones and value stocks outperformed growth stocks in the market.These factors were fundamental to the investment strategy development of the firm based on academic research.Additionally, SMB and HML were used by prominent researchers to measure the historic returns of small and value stocks. Thisenabled them to determine that, small and value stocks in domestic equity portfolios generated higher average returns than conventional portfolios. In likewise manner, they were able to determine that, the stock with relatively higher Beta’s did not necessarily account towards generating higher returns compared to low-beta stocks, which could be illustrated from their paper nicknamed “beta is dead”. Moreover, the researchers were also able to evaluate that, stocks with high ratio of book value of equity to market value of equity accounted towards generating consistently higher returns, compared to stocks with low BE/ME. Hence, the founders of the firm expected the factors to work in the market because of the extensive amount to academic research conducted by prominent researchers namely Fama and French. Where, the corporations core believe depended on academic research for its investment strategies.This, in turn, would enable the firm to add value to its investors through the academic researchconducted, which could enhance the amount of returns generated from their investments.
Describe DFA approach to Trading Equities, providing specific details on the sources of value add.
It can be evaluated that, the investment firm purchased mostly small stocks in bulk to avail discounts. Whereas, it sold its stocks in small quantities to its potential investors available in the market. This, in turn, resulted towards decreasing their transaction costs and minimized the risk of price falls, while improving its operational efficiency and enhancing the probability to higher expected returns in favor of the investors. Furthermore, DFA traded in different types of stocks, which includes small stocks over large ones, which were expected to generate higher returns on average and value stocks over growth stocks, expected to generate higher returns. According to the academic research created by Fama and French complemented their already implemented investment strategies,in which, the small stocks were expected to outperform large ones, which could be attributed to the lesser Beta value faced by small stocks in the market. Where the Academic research paper namely “Beta is dead” explained that higher beta stocks doesn’t necessarily generate higher returns compared to low beta stocks…………………
This is just a sample partical work. Please place the order on the website to get your own originally done case solution.