Texas A&M University
Mays Business School
Professor Yong Chen
Case 1: Dimensional Fund Advisors
(Harvard Business School Case # 9-203-026)
Due Wednesday, March 20
Subjects covered in the DFA case include efficient markets, models of capital market equilibrium, financial instruments, investment management, tax management, and stock trading. The case promotes an understanding of several important topics in finance.
(1) The case introduces many of the major empirical findings regarding the market produced during the past two decades. More often than not, this research contradicts prevailing theories, allowing students to debate concepts such as market efficiency and the validity of tools such as the CAPM and multifactor models.
(2) Students can view the latest evidence on the historical performance of different kinds of stocks—small, large, value, growth, US, international, etc.—and judge for themselves whether the market efficiently rewards risk, or whether performance differences constitute a historical fluke.
(3) Students can study in detail the difficult process by which fund managers use evidence of superior stock performance to construct a realistic investment strategy. The case explores the practicalities of creating an investment product and managing it effectively.
(4) The case examines DFA’s trading techniques, which have successfully produced superior returns. The case focuses particularly upon the firm’s handling of the adverse selection, or “lemons” problem. (See George Akerlof’s seminal 1970 paper, “The market for ‘lemons’: Quality uncertainty and the market mechanism” in the Quarterly Journal of Economics.) By purchasing large blocks of stocks, DFA makes itself especially susceptible to adverse selection and an excellent illustration of this pitfall.
(5) DFA recently introduced a new line of tax-managed funds. The case allows students to analyze these products, enhancing their understanding of...
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