1. Eugene Fama is a Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago and is the father of Efficient Market Hypothesis and multifactor models.

2. Kenneth French is a Heidt Professor of Finance at Dartmouth College and specializes in Capital Markets Research and multifactor models.

Step 1:    Take Risks Worth Taking

Risk is an inevitable part of the investment process. The good news is that risk can be managed. Financial science over the last 80 years has brought us a powerful understanding of the risks that are worth taking and the risks that are not.

A pioneering 1992 study by renowned academics, Eugene Fama1 of the University of Chicago and Kenneth French2 of Dartmouth College, demonstrated that increased exposure to small company stocks and value stocks can help increase returns. Historically, small company stocks and value stocks are more efficient as well. In other words, investors can generate the same return with less risk.

SIZE AND VALUE MATTER

Data Source: Dimensional Fund Advisors. January 1, 1979 – December 31, 2008. Monthly Data
Beta and Alpha are calculated based upon monthly data as compared to the S&P 500 Index
U.S. Large Growth is measured by the Russell 1000 Growth Index
U.S. Large Value is measured by the Russell 1000 Value Index
U.S. Small Growth is measured by the Russell 2000 Growth Index
U.S. Small Value is measured by the Russell 2000 Value Index

Eugene Fama and Kenneth French also concluded that length of maturity is a key determinant of bond performance. As investors would expect, return does improve as longer maturity bonds are added to a portfolio. Unfortunately, risk increases much faster than return as the maturity lengthens.

Data Source: Dimensional Fund Advisors. January 1, 1979 – December 31, 2008. Monthly Data
Beta is calculated based on monthly data as compared to the S&P 500 Index