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Dimensional Fund Advisors Make Money From The Efficient Market Hypothesis

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How does Dimensional Fund Advisors make money taking advantage of the Efficient Market Hypothesis? Dimensional Fund Advisors has managed to use the work of Eugene Fama to their best interests and continues even today to consistently out performs other investment firms.
While not a household name such as JPMorgan or Oppenheimer funds, that is by design. This firm doesn’t advertise, and it only sells its funds through advisers that have gone through a meticulous screening process. Furthermore, their funds are not sold on most brokerage firm’s platforms and it’s privately held. (Mahon, n.d.)
To understand how Dimensional Fund Advisors makes money from the Efficient Market Hypothesis (EMH) we must first understand what the hypothesis says. The EMH states that market efficiency is achieved because the price is determined by the aggregate data and intrinsic information of the company, therefore there are no undervalued stocks and the system cannot be beat. (Efficient Market Hypothesis, 2015) …show more content…

The Fama and French three factor model expands the Capital Asset Pricing Model (CAPM) by adding size and value to the pricing model along with the existing risk value. (Fama & French three factor model, n.d.)
The Capital Asset Pricing Model (CAPM) states that investors should be compensated in more than one way; both time and money are factors when considering an investment.
So the expected rate of return should be the same as the rate of return on a risk free security plus a risk premium and is calculated

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