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These articles contain the opinions of the authors but not necessarily of Dimensional, and do not represent a recommendation of any particular security, strategy, or investment product. The authors' opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.
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- Author:
- Title
Truman Clark, retired Dimensional executive, explains the advantages of seeking exposure to different risk dimensions through core equity strategies.
Many studies have discussed whether securities are efficiently priced. The available evidence indicates that professional money managers have not been able to exploit cost-effectively any pricing errors that do occur.
A look at the Fama/French factor returns reveals presidential elections don't seem to impact market performance. However, history shows that factor performance in the month preceding an election seems to predict reelection results.
Date:
September 2003
2003-09-15
The unpredictability of changes in interest rates has a simple implication that is the basis of Dimensional's bond strategies. Specifically, current prices of discount bonds are good estimates of the prices of bonds with the same maturities one period from now.
Some of the important financial theories underlying the behaviour of stock returns are summarized. Results of several empirical studies into these theories are also described.
In spite of having constructed a diversified portfolio, the disciplined investor will still notice at any given time a small number of highly volatile stocks that seem to threaten to undermine the goal of the portfolio. This, however, is an example of random error that must be tolerated but can be explained.
Though they were only launched in the early 1970s, index funds have attracted many investors lured by the logic and overwhelming empirical evidence in support of indexing. This paper develops a case for the use of index funds and Dimensional's enhanced index funds.
Despite recent arguments to the contrary, there is no evidence of book-to-market ratio (BtM) becoming irrelevant for identifying value stocks. Compared to popular alternatives, BtM is at least as good at producing dispersion in average returns.
Many investors and financial commentators believe high earnings growth rates and high rates of return go hand in hand. But earnings growth only determines the breakdown of total returns into dividend yield and capital gain. Total expected returns are determined by risk alone.
Old-school indexers claim that holding anything beyond the market portfolio is akin to stock picking. But market risk is only one factor driving returns, and an index fund that takes advantage of other dimensions of risk is not betting—it's the new face of indexing.
The unusually strong performance of large cap stocks in the late 1990s is put into perspective. Patterns in the historical returns represent the normal drift of a random walk.
A transcript of Rex Sinquefield's opening statement
in a debate about active vs. passive management with Donald Yacktman at
the Schwab Institutional conference in San Francisco, October 12, 1995.