Questions for at the Dimensional Fund Advisors (The Size Effect and The Value Effect) - Case Study Example

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This is seen in cases where DFA pushes for academics to work on subjects of interest to the firm and rewarding them with a share of returns from the investment strategies…
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Questions for Case at the Dimensional Fund Advisors (The Size Effect and The Value Effect)
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College: The Value Effect and the Size Effect The Dimensional Fund Advisors (DFA) believed in the value of sound academicresearch as a business strategy. This is seen in cases where DFA pushes for academics to work on subjects of interest to the firm and rewarding them with a share of returns from the investment strategies that are a result of their innovative theories and empirical analyses (Cohen 1). The use of stock size and book to market ratio to predict future returns is not necessarily a valid argument against market efficiency. This is because sited are mere predictions and not actual projections of returns.
DFAs business practices of trying of avoid the lemons problem while not doing any fundamental analysis suggest that they believe strong form of market efficiency but worried that semi-strong form of market efficiency might fail (Cohen 4). These sentiments can be illustrated by the dedication to the principle of market efficiency where over any given time frame; no investor has the ability to pick stocks that would beat the market in its performance. Its main concern was the presence of negative private information known to the seller but not to the market.
According to Cohen, the Fama-French -three factor type of efficient market brings into consideration three products; size, value, and market risk factor in the capital asset pricing model (13). With the deterioration of the small stocks in the 1980s and 1990s, these small stocks managed to outperform small stock indexes and small cap funds due to purchase discounts which were combined with the avoidance of adverse selection.
It is true to say that due to the size effect, smaller stocks tend to do better than large stocks as in the case of LinkedIn and Google where the former has higher returns than the latter. Conversely, according to the value effect, since Google has a higher book to market ratio as compared to LinkedIn, this means that in this case, Google gunners more returns (Cohen 19).
In consistence to the hypothesis that market price is efficient, we can conclude that small firms and value firms on average have high returns. However, investors are not crazily excited about the small and value investment products that DFA recently offered, which exactly focus on earning the high returns of small and value firms.
Work Cited
Cohen, Randolph. Dimensional Fund Advisors, 2002. Journal of Harvard Business School. 01.28. (2003).1-21 Read More
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