Question

Question 5 Dimensional Fund Advisors (DFA) is a passive investor. In 1992, it launched a fund that mostly invest in the U.S. large cap value stocks. Ever since then, this fund has consistently outperformed the S&P500 index. Some reporters attribute the success of this fund to luck. Some reporters attribute the success of this fund to superb stock selection skills of its portfolio managers. Do you agree or disagree to these explanations? Explain why (use at most three sentences). If you don't agree, what is your explanation for the success of this fund? Explain why (use at most three sentences).

Answer 1

According to the definition Passive investor is someone who invest for generally invest for long term . Passive investor has a very low churning possibility of portfolios or fund i.e. they limit the amount of buying and selling in the portfolios. The strategy that is used by the Passive investor is Buy and Hold Strategy i.e. they they are not generally affected by short term market effect.

According to Passive strategy, passive investor will never be able to beat the market. Sometimes Passive investor may be able to beat the market by a little but it won't be able to generate huge returns even if they generate they cannot consistently outperform the market i.e. in this case S&P500 Index.

The only way it can consistently outperform the market is by doing Active Investing.

Hence I agree with the statement that the success of Dimensional Fund Advisors (DFA) is due to luck, because being a passive investor one cannot consistently outperform the market. Hence the success of the fund is not due to stock selection skills of portfolio manager but due to luck.