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03 December, 2014

Mean Reversion in the Dimensions of Expected Stock Returns

We do not believe that it is possible to accurately predict the future returns of markets.  That doesn't mean that many, many people won't continue to try, usually unsuccessfully.  There is a great deal of research around what elements of performance may have some predictive capability, i.e. when it is possible to improve the odds of getting a better return for your money for a given amount of investment risk.  In this article Jim Davis, Vice President of Dimensional Fund Advisors, presents some research that Dimensional have conducted into the equity, profitability, size, and value premiums, the areas of the market where Dimensional believe that out performance can be demonstrated.  These premiums are not believed to be predictable, and up until now it is considered that the only way to capture them is to remain invested through good times and bad.  This study is designed to test whether the delivery of these premiums can be predicted, and thus avoided when small or negative, or whether any 'rules' which an investor might discover will prove to be transient, and unreliable in the future.  It is after all future performance that matters, and future performance which is most difficult to (accurately) predict.  (SPOILER: You need to remain invested to benefit from these premiums!)

Download the Research Brief PDF >>>  (2 pages - light technical content)

Download the White Paper PDF >>>   (14 pages - heavy technical content)

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