FINC314 Lecture Notes - Lecture 14: Dimensional Fund Advisors, Efficient Frontier, Downside Risk
10 Feb 2020
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This exploratory note explores james davis" whitepaper, efficient frontiers constructed with historical. Data can be misleading, and also presents a couple of alternatives to the mean-variance formulation of. Dimensional fund advisors are a fund company that run over sh. 5 trillion. Mean-variance efficiency, of course, assumes that investors would like to achieve a given expected return with as little uncertainty about the outcome as possible. Viewed another way, investors would like the highest possible expected return for a given level of return variation. Portfolios that achieve this objective are said to be mean-variance efficient. Consider the following figure (ex ante = from the beginning): Since investors prefer high expected returns and low standard deviations (or variances), they like to go as far northwest as possible in two-dimensional space. The available investments, of course, constrain how far investors can go. An important note: the hypothetical frontier shown above utilizes ex ante expected returns (generated via an asset pricing model).
