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You need to read the case carefully and answer these questions.<\/span><\/u><\/strong><\/p>\n Why has DFA’s small stock fund performed so well when the Fama-French research is well-known? How do they manage to trade small stocks profitably? Can DFA keep its competitive advantage in the future? Why don’t competitors emulate DFA’s approach?<\/span><\/p>\n <\/span><\/p>\n <\/span><\/p>\n <\/span><\/p>\n And here are some resources that I download from the internet. You can use it as a reference but can not copy anything. You need to use your word to write the answer. Thank you so much<\/span><\/u><\/p>\n <\/span><\/p>\n 1. Discuss DFA’s trading strategy. How does it work, and what are the costs and benefits? Can DFA keep a competitive advantage in the future? Why don’t competitors emulate DFA’s approach? <\/span><\/p>\n The interesting part is that DFA would simply absorb the selling demand of others. Under this strategy, DFA is able to extract a discount on the stock purchase. As word spread that DFA was willing to buy large blocks of illiquid stocks from eager sellers, calls and electronic inquiries began to pour in at a rate of hundreds per day. If a mutual fund wants to dump a large position in a stock, instead of sending the trade to the NYSE floor, the manager called an investment bank’s block-trading desk or a broker-dealer, who then called DFA. DFA saw about 1,000 potential trades in a typical day and executed only about 20. <\/span><\/p>\n The costs are that before executing the deal, DFA has to address a list of several crucial questions including adverse selection, the background of the trading partners, whether a trade is the entire block of stock, how will a trade affect diversification of the fund and the magnitude of the discount. <\/span><\/p>\n However all those problems have brought a lot of benefits. Purchase discounts combined with the avoidance of adverse selection had enabled DFA’s passively managed small-stock portfolio to outperform typical small-stock indexes by about 200 basis points per year over the past 20 years. In 2001, someone reckoned that there was a 0.83% average discount for all of DFA’s orders.<\/span><\/p>\n <\/span><\/p>\n <\/span><\/p>\n 2. Why has DFA’s small stock fund performed so well? <\/span><\/p>\n We conclude 6 reasons for the stellar performance of DFA’s small stock funds: 1) Distinct Investment Strategies. <\/span><\/p>\n Dimensional founders believed passionately in principle of “passive” stock market investing. As passive investors believe in the so-called efficient market theory, which maintains that almost no one can be smarter than the market as a whole in the long run. Hence DFA buy and hold broad portfolios of shares, betting that their returns over time will trump the gains of most “active” managers who try to find the stocks that would outperform the market. <\/span><\/p>\n Dimensional does not actively pick stocks or passively track commercial indexes but instead structures portfolios based on risk and returns as identified through financial science. Their main objective is to help clients structure globally diversified portfolios and to increase returns through state-of-the-art portfolio design and trading. <\/span><\/p>\n <\/span><\/p>\n 2) Investment Philosophy Is Grounded in Robust Academic Research <\/span><\/p>\n DFA ‘s investment strategies were based on sound academic research, which proves successful. <\/span><\/p>\n DFA began as a small-stock fund in 1981, attempting to take advantage of the “size affect” (excess performance of small stocks) that had been discovered by a number of academic researchers. Most notably is the academic paper from the University of Chicago PH.D. dissertation of Rolf Banz, small stocks had consistently outperformed large stocks over the entire history of the stock market from 1926 through the late 1970s. <\/span><\/p>\n Later, research by Professors Eugene Fama and Kenneth French identified equity market exposure, capitalization, and price relative to fundamentals as the 3 factors that primarily determine the returns of a broadly diversified portfolio. Their work has held up through rigorous open review and Dimensional strategies focus on their insight.<\/span><\/p>\n <\/span><\/p>\n 3) Combination of Theory and Practice. <\/span><\/p>\n By acting as a conduit between financial economists and practicing investors, DFA has pioneered many strategies and consulting technologies now taken for granted in the industry. This makes for an exchange of ideas that allows Dimensional to position themselves at the forefront of innovative solutions. <\/span><\/p>\n The reason why DFA’s RIA business has grown rapidly (see exhibit 2) was good evidence that DFA educated its RIAs by providing them with access to top researchers who were developing innovative theories and empirical analyses. The RIAs then used what they had learned to advise their clients. And this advice generated questions that DFA delivered back to the academics for continued their insight. <\/span><\/p>\n 3) Combination of Theory and Practice. <\/span><\/p>\n By acting as a conduit between financial economists and practicing investors, DFA has pioneered many strategies and consulting technologies now taken for granted in the industry. This makes for an exchange of ideas that allows Dimensional to position themselves at the forefront of innovative solutions. <\/span><\/p>\n The reason why DFA’s RIA business has grown rapidly (see exhibit 2) was good evidence that DFA educated its RIAs by providing them with access to top researchers who were developing innovative theories and empirical analyses. The RIAs then used what they had learned to advise their clients. And this advice generated questions that DFA delivered back to the academics for continued research. <\/span><\/p>\n Also, DFA encouraged academics to work on subjects of interest to the firm by giving any professor a share of profits from investment strategies derived from his or her ideas. <\/span><\/p>\n 4) Low Costs – low management fee to attract client <\/span><\/p>\n Their investment management fees are positioned well below those of traditional active managers. DFA’s fees tended to be lower than those of most actively managed funds but higher than those of pure index funds. This was fitting given DFA’s position in the market as a passive fund that still would add value. And this competitive and well-positioned pricing helped attracted client. <\/span><\/p>\n <\/span><\/p>\n 5) Smart Trading Can Increase Returns <\/span><\/p>\n a. Purchase discount <\/span><\/p>\n DFA’s buy-hold approach and trading strategies are designed to minimize costs. Careful trading can reduce or even reverse the costs borne by traditional managers. Because Dimensional focuses on capturing the systematic performance of broad market dimensions rather than the random fluctuations of individual securities, they can keep costs low. They can keep costs low, patiently and expertly, by reducing turnover and concentrating on favorable price execution. <\/span><\/p>\n Instead of bidding in the open market to buy stocks, DFA would prefer to absorb the selling demand of others. In return for accepting large blocks of stock from market participants who had a strong desire to sell, DFA was able to extract a discount on the stock purchase. From the exhibit 10 – for the Small Cap Portfolio, In 2001: 36% of purchases were block trades, whose average discount reached 3.33%. Considering the loss of 0.58% to costs on remaining 64% orders that DFA had to patiently buy shares from open market, the weighted average discount was 0.83% for all orders. <\/span><\/p>\n We also note from back earlier to 1998: 50% of purchases were block trades, with average discount reached 3.56%. A weighted average discount for all orders was higher, being 1.64%. <\/span><\/p>\n b. Avoidance of adverse selection <\/span><\/p>\n DFA saw about 1000 potential trades in a typical day and 20, which indicates that DFA’s selection process is careful and tactful. They applies “adverse selection problem” so as to avoid anything wrong in the stock orders that they are going to buy. This is also another important reason that enabled FDA’s passively managed small-stock portfolio to outperform typical small-stock indexes by about 200 basis points per year over the past 20 years. <\/span><\/p>\n <\/span><\/p>\n 6) Professional team <\/span><\/p>\n The ability of skilled DFA traders to contribute to a fund’s profits even when the investment was inherently passive and their ability to turn the difficulty of trading small stocks into an opportunity. DFA team’s professionalism and ability is also a critical reason for the success of DFA’s small stock fund, although the case did not obviously mention this.<\/span><\/p>\n <\/p>\n The post Portfolio\u00a0Management appeared first on Custom Essay Papers.<\/p>\n","protected":false},"excerpt":{"rendered":" Normal 0 false false false EN-US ZH-CN X-NONE \/* Style Definitions *\/ table.MsoNormalTable {mso-style-name:”Table Normal”; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-parent:””; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:DengXian; mso-ascii-font-family:DengXian; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:DengXian; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:DengXian; mso-hansi-theme-font:minor-latin; mso-font-kerning:1.0pt; mso-fareast-language:ZH-CN;} You need to Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-430287","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/430287","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=430287"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/430287\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=430287"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=430287"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=430287"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}