RSM330 Assignment 2_Student Work

RSM330 Assignment 2_Student Work - RSM330 Assignment 2...

Info icon This preview shows pages 1–3. Sign up to view the full content.

RSM330 Assignment 2 – Group Work Due: March 27, 2014 in class IMPORTANT: Before you start this assignment, please read the case “Dimensional Fund Advisors: 2002”. (Omit the section entitled New Products: Tax-Managed Funds, on pages 9-10 of the case). Use the link below to download this case from the Harvard Education website (cost $3.95 US, payable online). Coursepack link: Requirements: Please type your assignment, present data neatly in tables and staple pages securely. Do not put your assignment in a folder. Please use the Rotman Commerce cover page and list the student numbers and names of your group members. Question 1: Harvard Case: Dimensional Fund Advisors: 2002 (Total of 15 points) Please answer the following questions, based on what you learned from reading the case. To obtain full marks you must answer correctly and keep your answers very brief, clear and to the point. (a) (5 points) According to what you read in the case, what reason did Fama and French give for the outperformance of value stocks? Stocks with a high ratio of book value of equity to market value of equity (BE/ME) exhibited consistently higher returns than stocks with low BE/ME. Book-to-market ratio was the most powerful scaled-price variable for predicting stock returns and it subsumed the other variables in “horse race” tests. Value stocks outperformed growth stocks for the only reason any asset consistently outperforms in a rational, efficient market because they were riskier. The reason why value stocks are riskier is that it had low prices so that it indicated that companies with poor recent performance of both stock return and profitability. (b) (5 points) What did you learn about the consistency of the outperformance of value stocks and small cap stocks? Both value and small cap stocks outperform in the boom economy. From the perspective of size effect, small companies were hard hit when U.S. went into a deep recession in the early 1980s. Even though the economy started to boom, small stocks continued to lag. Therefore, the business cycle affects the performance of small and large stocks. Recession will also lead value stocks to underperform. There were high-technology stocks with very high market capitalizations and relatively few assets in place so that the growth stocks performed better. 1
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

(c) (5 Points) Briefly explain the reason for DFA’s approach to trading small cap and micro cap stocks. One crucial reason DFA saw small stocks as so attractive was the findings of academic researches. It indicates that small cap stocks outperform large cap stocks and if this pattern were to continue, small stock investing could deliver substantial returns to investors. Also, purchase discounts and the avoidance of adverse selection are two strategies to consist the outperformance of small cap stocks.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.
  • Winter '14
  • TD Blue Chip

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern