RSM330 Assignment #2_Student work

RSM330 Assignment #2_Student work - Question 1 Harvard Case...

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Question 1: Harvard Case: Dimensional Fund Advisors: 2002 a) According to what you read in the case, what reason did Fama and French give for the outperformance of value stocks? >>>> Value stocks have relatively high ratio of book value of equity to market value of equity, which consistently exhibited higher returns. In a rational and efficient market, value stocks outperformed growth stocks because they were riskier, as they have lower prices. b) What did you learn about the consistency of the outperformance of value stocks and small cap stocks? >>>> When the economy’s booming, value stocks and small cap stocks outperformed growth and big cap stocks; whereas in an economic recession, the value stocks and small cap stocks underperformed growth and big caps stocks. c) Briefly explain the reason for DFA’s approach to trading small cap and micro cap stocks. >>>> Rolf Banz found that small stocks had consistently outperformed large stocks over the entire history of stock market from 1926 through the late 1970s; therefore DFA saw small stocks very attractive because DFA believed that this pattern would continue. Furthermore, DFA can reduce transaction cost and create value; also DFA could get a discount price on trading these stocks. Question 2: Canadian Mutual Funds a) RBC O’Shaughnessy US Value - A TD Blue Chip US Equity - I TD US Index - I Total Assets ($ CAD million) 1700 1600 701.2 NAV 15.26 23.76 16.60 MER 1.55% 2.55% 0.55% 5 Star Rating 4 4 4 Investment Style Large value Large Growth Large Blend Asset Turnover 61% 21% 10% P/E ratio (forward) 14.49 24.77 16.02 Dividend Yield 2.61% 0.71% 2.34% Star ratings: It is the morningstar risk-adjusted rating, which uses one to five stars to rank the funds in the same category based on how well they've performed (after adjusting for risk and accounting for all sales charges) in comparison to similar funds. If a fund scores in the top 10% of its category, it will receive 5 stars indicating it has relatively good value at its current price; the fund in the next 22.5% will receive 4 star etc and the lowest 10% will get only one star. b) 1. Asset turnover Asset turnover refers to total value of shares divided by the average market capitalization during that period. Theoretically, actively managed fund will tend to have high turnover ratio. All things being equal, investors would like low turnover funds. An aggressive growth stock fund will have higher turnover ratio than a value stock fund. However, in our case, the large value stock RBC has higher turnover ratio than the growth stock TD Blue Chip US. Therefore, we cannot conclude the relationship between the asset turnover ratio and the investment style.
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2. P/E ratio P/E ratio = Market Value per Share/ Earnings per Share (EPS) A valuation ratio of a company's current share price compared to its per-share earnings. In general, a high P/E suggests that investors are expecting higher growth potential in the future compared to companies with a lower P/E ratio. So the investment style with high P/ E ratio should be growth style stock. Oppositely, value stock has low P/E ratio.
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