Dimensional Fund Advisors

Questions for Case on Dimensional Fund AdvisorsWhy do we use case studies?Cases allow us to see how course ideas are applied in actual business settings. As is common with case studies, you will grapple with “complex and often ambiguous real-world scenarios”. And, as in real business settings, you will have to figure out which information to ignore for our purposes and which informationto focus on.Backgroundfor this caseWe have discussed the three driversof investment returns: #1 capital allocation; #2 asset allocation; #3 security selection. In class, we discussed how mean-variance analysis provides a framework for capital allocation and asset allocation. In contrast, we have said less about security selection. In principle, the mean-variance framework applies to security selection, but it is tricky to implement. In the market efficiency discussion, we will see that data suggest that successful security selection (while not impossible) is tougher than most people believe. This case discusses one middle ground between asset allocation and security selection: a class of anomalies called“return factors”. Inthefinancial media, you might alsosee it under the name “factorpremia”, “factor risk premia” (though it’s debated whether these anomalies are due to riskor investor irrationality... this is the joint hypothesis problem again), “style premia”, “alternative beta”, or “smart beta”.We also do this case for several other reasons:•Look at actual investment products and hypothetically evaluate them. •Examine how academic research reshaped the investment landscape. Most major asset managers offer products related to the return factorswe will discuss.•Peek into execution details, in particular trading costs and taxes. •Historically, this case was often used in the Investment Management class at the Harvard Business School (though it depends on the professor teaching). •Naturally, the disclaimeron the syllabusapplies: Our discussion