This case discusses the unique value proposition of Dimensional Fund Advisors (DFA), which used academic research to create specialized portfolios focused on Small Capitalization companies. Their investment philosophy particularly focused on research by Fama and French and Banz. They researched how small cap companies tend to outperform large cap companies over time. In addition, FDA created an additional competitive advantage by created trading efficiencies to reduce transaction cost.
1. Fama and French findings shocked the modern portfolio theory and their study was nick named "Beta is Dead". With respect to CAPM they found that stocks with high betas did not have consistently higher returns than low-beta stocks. Furthermore, Fama and French concluded that a high book value to market value was the most important variable related to predicting high stock returns on small cap stocks. 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. Dimensional defines small companies as those whose market capitalization comprises the smallest 12.5% of the total market universe. On a quarterly basis, the market capitalization ranking of eligible stocks is examined to determine which issues are eligible for purchase and which are sale candidates. The US Micro Cap Portfolio invests in securities of US companies whose size falls within the smallest 4% of the total market universe. The US Small Cap Portfolio invests in securities of US companies whose size falls within the smallest 8% of the total market universe.
Dimensional's value strategies are based on the Fama/French research in multifactor portfolios designed to capture the return premiums associated with high book-to-market (BtM) ratios.
On July 5, 2001, Kimi Ford, a portfolio manager at NorthPoint Group, a mutual-fund management firm, pored over analysts' write-ups of Nike, Inc., the athletic-shoe manufacturer. Nike's share price had declined significantly from the beginning of the year. Ford was considering buying some shares for the fund she managed, the NorthPoint Large-Cap Fund, which invested mostly in Fortune 500 companies, with an emphasis on value investing. Its top holdings included ExxonMobil, General Motors, McDonald's, 3M, and other large-cap, generally old-economy stocks. While the stock market had declined over the last 18 months, the NorthPoint Large-Cap Fund had performed extremely well. In 2000, the fund earned a return of
Over the previous five years, the return of the ProIndex fund have outperformed the S&P 500 index, as the 5-year-return is nearly 3 times than the benchmark and the annualised return is nearly 2 times than the benchmark. It means ProIndex fund has a significant increase in value within that period. However, the ProIndex Fund has a higher standard deviation which means it is more risk than the S&P 500 index. Especially for the annualised standard deviation, it is approximately 10% higher than the benchmark. The correlation coefficient between the ProIndex and benchmark is about 0.65 which means both two variables are positive changing consistently, but there are still some other factors which have impacts on the relationship between two variables as the correlation is less than 1. Furthermore, the higher beta, 1.0132, which is more than 1 and it may be one of the reasons for high risk as well since it is more sensitive to the market change. It means that the ProIndex fund would increase by 1.0132% if the market increased by 1%.
Investcorp corporate locations in North America and Europe concentrations on investment opportunities in mid-sized companies (“Investcorp Bank,” 2016). The company’s sites in the Middle East and North Africa (MENA) focus on managing minority or majority investments in mid-sized companies, particularly family-owned businesses. Real Estate Investment offers clients investment opportunities for cash flow and capital gains over a 5-year investment period (“Investcorp Bank,” 2016). The company’s hedge funds yield risk-adjusted returns from hedge fund investments. Investcorp diligently co-invest with their clients to ensure that the firm’s interests are firmly aligned with the company (“Investcorp”).
Life is about the good things, and life is better when our financial future is secure. Yes, there are always ups and downs in life, and investments are no different, but there are many things that you can do to protect yourself and increase your financial wealth. A good independent financial advisor can really help you in your journey. If you are thinking about investing more into your pension, or are keen on other ways to build up a secure financial future, then read on.
Financial planning is such a delicate matter. For you to be able to secure your monetary future, you need a financial advisor. Sometimes, we can't even trust ourselves from saving our own money and keeping track of our income and expenses because most of us spend a lot. Some even spend more than what they earn. We need someone who can be trusted to take care of our funds and will know how and where to invest it so that it can grow.
My God there are so many careers out there, who in the world can pick just one. That’s what’s been weighing on my mind heavily is what career is right for me. I’ve thought of a couple that interest me but I want to find out everything there is to know about a financial advisor. The reason that I’m interested in this field is how everything is the same when it comes to the actually math behind the career. Also I like to deal with people and money so a job as a financial advisor just seems right for me but I intend to find out as much as I can to make sure there’s nothing surprising or any kinks in what sounds like the perfect job for me.
This assignment is concerned with your understanding of the key issues relative to portfolio analysis and investment. In completing this assignment you are to limit your scope to the US stock markets only. Use the Cybrary, the Internet, and course resources to write a 2-page essay which you will use with new clients of your financial planning business which addresses the following issues and/or practices:
You would not buy a home, car or other large purchases without researching what product offered you the most for your money. The same is true when investing in a company. Investors do avid research on multiple companies to find what company matches the investors' criteria. In this paper Team C will research both AT&T and Verizon's financial documents. Team C will compare selected ratios, cash flow and make recommendations how both companies can manage cash flow for the future.
The MDA model also showed potential to ease some problems in the selection of securities for a portfolio, but further investigation was recommended.
Capital Asset Pricing Model (CAPM) is an ex ante concept, which is built on the portfolio theory established by Markowitz (Bhatnagar and Ramlogan 2012). It enhances the understanding of elements of asset prices, specifically the linear relationship between risk and expected return (Perold 2004). The direct correlation between risk and return is well defined by the security market line (SML), where market risk of an asset is associated with the return and risk of the market along with the risk free rate to estimate expected return on an asset (Watson and Head 1998 cited in Laubscher 2002).
In the paper published by Xiong (2010), it is presented that a portfolio’s total return can be disintegrated into three components: the market return, the asset allocation policy return in excess of the market return, and the return from active portfolio management. The asset allocation policy return refers to the fixed asset allocati...
In the finance world there are many jobs available that offer business owners the tools to be successful. It is key as a business owner and company manager to gain insight from examination of a company’s financial statement through he eyes of a professional. This is where a personal financial advisor can be a key part for a successful future. A financial advisor “can offer you the professional expertise and insight that you may not have” (The Importance of a Financial Advisor., 2016). A personal financial advisor’s job description can be described as “responsible for providing financial guidance and investment to individuals regarding investment strategies.
Efficient market hypothesis was developed by professor Eugene Fama at the University of Chicago Booth School Of Business as an academic concept of study through his published Ph.D. thesis in the early 1960s . Fama proposed two crucial concepts that have defined the conversation on efficient markets in his thesis. The efficient market hypothesis was the prominent theory in the 1960s, Fama published dissertation arguing for the random walk hypothesis to support his efficient market theory. “Fama demonstrated that the notion of market efficiency ...
Block, S. B., & Hirt, G. A. (2005). Foundations of financial management. (11th ed.). New York: McGraw-Hill.
The Modern portfolio theory {MPT}, "proposes how rational investors will use diversification to optimize their portfolios, and how an asset should be priced given its risk relative to the market as a whole. The basic concepts of the theory are the efficient frontier, Capital Asset Pricing Model and beta coefficient, the Capital Market Line and the Securities Market Line. MPT models the return of an asset as a random variable and a portfolio as a weighted combination of assets; the return of a portfolio is thus also a random variable and consequently has an expected value and a variance.