Trading on the Size and Value Premia: The case of Dimensional Fund Advisors - HBS Case (2002)

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1 MODULE SPECIFICATION UNDERGRADUATE PROGRAMMES KEY FACTS Module name Asset Management Module code IF2210 School Cass Business School Department or equivalent UG Programme UK credits 15 ECTS 7.5 Level 5 MODULE SUMMARY Module outline and aims This course aims to provide a thorough understanding of the issues that are relevant to the asset management industry, with special emphasis on understanding and measuring investment performance. Our discussions will focus on mutual funds, hedge funds and exchange traded funds with less emphasis given to other fund management vehicles. The course will not cover security analysis. Content outline WEEK 1: Introduction and Overview of the fund management industry Background discussion: market efficiency Asset classes Types of fund management vehicle Statistical overview of the asset management industry WEEK 2: Closed-End Funds Background discussion: Testing for market efficiency Behavioural approach to the closed end fund discount Liquidity-based approach to the closed end fund discount Managerial ability explanation of the closed end fund discount WEEK 3: CAPM and Beyond CAPM Background discussion: Testing the CAPM model Factors beyond the market factor The Fama French three factor model and the size and value factors The Carhart four factor model and the Momentum factor WEEK 4: Portfolio Performance Evaluation Background discussion: Behavioural finance Trading on the Size and Value Premia: The case of Dimensional Fund Advisors - HBS Case (2002) Measuring Mutual Fund Performance, Harvard Business School case Measuring returns o Time weighted returns

2 o Money weighted returns Adjusting returns for risk o Sharpe ratio o M-squared o Treynor ratio o Jensen's Alpha o Dollar weighted returns Style Analysis Performance measurement with changing portfolio composition o Market timing measures o Market timing measures that condition on public information Controlling for size and value in performance measurement Controlling for size, value and momentum in performance measurement WEEK 5: MID TERM TEST WEEK 6: Mutual funds Background discussion: Introduction to the mutual fund industry How do mutual funds perform? WEEK 7: Hedge funds What are hedge funds? o Where do they fit in? o How do they differ from mutual funds? Industry Development Hedge funds strategies Why do hedge funds earn so much money? Fees and incentives Hedge fund indices and fund of funds Aronson, Johnson and Ortiz, INSEAD 2005 case WEEK 8: Exchange traded funds (ETFs) ETFS vs mutual funds Advantages and disadvantages Types of ETFS o Index-based ETFs o Sector based ETFs o Country ETFs o Commodity ETFs WEEK 9: Portfolio construction Background discussion: mean-variance analysis Limitations of mean-variance analysis The Black-Litterman model Equally weighted portfolios

3 WHAT WILL I BE EXPECTED TO ACHIEVE? On successful completion of this module you will be able to:- Knowledge and understanding: Analyse key asset pricing anomalies that are inconsistent with market efficiency and the CAPM Skills: Analyse the role of size and value factors in determining security returns and the Fama French 3 factor model (market, size and value factors) Analyse the role of momentum in determining security returns and the Carhart four factor model (market, size, value and momentum factors) Interpret key features of the different parts of the money management industry in particular understand their structure, their performance, their fees and the advantages and disadvantages to investors of investing in these different sectors Calculate various measures of risk-adjusted performance including Sharpe ratio, M-squared, Treynor ratio, Jensen's 1 factor alpha, Fama-French 3 factor alpha and Carhart 4 factor alpha Calculate different ways to measure fund manager timing ability Construct mean-variance efficient portfolios and the problems associated with doing so Values and attitudes: Examine mutual fund scandals to help in developing an ethical approach to investing HOW WILL I LEARN? A variety of learning and teaching methods will be used in this course. Lectures are used to introduce context, concepts and techniques illustrated with practical and current examples. You will also have the opportunity to participate in class discussions and work through examples and exercises with the support of the lecturer. It is strongly recommended that you attend ALL lectures. Tutorials are used to explore the concepts and practices covered in the lectures in more detail. Specifically, they are used primarily to demonstrate technical material, although some discussion and analysis will accompany the practical techniques. Tutorials take place in smaller groups and you are expected to interact with the tutor and other students. Key learning and teaching resources will be put on the module website on Moodle.

4 In the independent study time you are encouraged to read widely and in depth around particular topics in preparation for lectures and tutorials. You may also spend time working through sample exercises and questions. In addition you will be preparing and undertaking your coursework assignments and preparing for your final examination. Teaching pattern: Teaching type Contact hours Self-directed study hours Placement hours Total student learning hours Lectures TOTALS: WHAT TYPES OF ASSESSMENT AND FEEDBACK CAN I EXPECT? Assessments You will be assessed in two ways. Halfway through the course you will be set a midterm test which will be part multiple-choice and part short questions. The final exam which will be sat at the end of the academic year will be a longer exam which will have multiple-choice short question and long question elements. 70% of the marks of the course are attributable to the final exam and 30% to the mid-term test. Assessment pattern: Assessment type Short description Weighting % Minimum qualifying mark Pass/Fail? Set exercise Mid term test N/A Written exam Exam N/A Assessment criteria Assessment criteria are descriptions of the skills, knowledge or attributes you need to demonstrate in order to complete an assessment successfully and Grade-Related Criteria are descriptions of the skills, knowledge or attributes you need to demonstrate to achieve a certain grade or mark in an assessment. Assessment Criteria and Grade- Related Criteria for module assessments will be made available to you prior to an assessment taking place. More information will be available in the UG Assessment Handbook and from the module leader. Feedback on assessment Following an assessment, you will be given your marks and feedback in line with the University s Assessment Regulations and Policy. More information on the timing and type of feedback that will be provided for each assessment will be available from the module leader.

5 Assessment Regulations The Pass mark for the module is 40%. Any minimum qualifying marks for specific assessments are listed in the table above. The weighting of the different components can also be found above. The Programme Specification contains information on what happens if you fail an assessment component or the module. INDICATIVE READING LIST TEXT BOOK: Bodie, Kane & Marcus. (2011) Investments. McGraw-Hill Higher Education; 9th Edn. ARTICLES: Dimson, Marsh, Staunton: Risk and Return in the 20 th & 21 st centuries. -Dimson and Minio-Kozerski: Closed-End Funds: A Survey. -Cherkes, Sagi and Stanton: A Liquidity-Based Theory of Closed-End Funds. -Berk and Stanton: Managerial Ability, Compensation, and the Closed-End Fund Discount. Fama and French: The cross section of expected stock returns. Measuring Mutual Fund Performance, Harvard Business School case. Dichev: What Are Stock Investors Actual Historical Returns? Evidence from Dollar- Weighted Returns. Friesen and Sapp "Mutual fund flows and investor returns: An empirical examination of fund investor timing ability". W. Ferson and V. Warther, Evaluating fund performance in a dynamic market, Financial Analysts Journal, Nov-Dec 1996, Fama and French, Mutual Fund Performance. Berk and Green-Mutual Fund Flows and Performance in Rational Markets. Berk - Five Myths of Active Portfolio Management. Bodie, Kane, and Marcus Chapter: 26. Stulz, Hedge Funds: Past, Present and Future, Journal of Economic Perspectives. Bodie, Kane, and Marcus Chapter: 4. DeMiguel,Garlappi, Uppal-Optimal Versus Naive Diversification: How Inefficient is the 1/N Portfolio Strategy? Version: 4.0 Version date: November 2015 For use from:

6 Appendix: see for the full list of JACS codes and descriptions CODES HESA Code Description Price Group 133 Business & Management JACS Code Description Price Group L111 Financial Economics