Assignment Paper

(Executive summary) Based on your analysis in the following questions, would you endorse the RAFI strategy to any of your institutional clients? (Hint: How much weight should you put on that asset in a portfolio?)

2. Does Research Affiliates believe the stock market is efficient? Why does Research Affiliates think the Fundamental Index strategy produces better weights than the standard cap-weighted approach? (Avoid using case-specific jargon terms like “economycentric”)

3. Even if Research Affiliates views about fundamental weights being better than market cap weights were true, are there any extra costs/expenses for using fundamental weights in trading strategies that would not be present using market-cap-based weights?

4. Look at Exhibit 14 in the case. In this exhibit, what kinds of stocks get relatively more weight in the fundamental index strategy compared to the (cap-weighted) Russell 1000?

5. Did the RAFI ETF earn CAPM alpha leading up to this decision? The data is on Canvas. Note that this ETF was essentially the only means investors had to actually invest real money using the fundamental index methodology.
6. RAFI’s sales pitch was based on the analysis in Exhibit 4. Notice the time period of their analysis and read the notes at the bottom of the Exhibit. Do you have any reason to trust your analysis more than RAFI’s analysis in Exhibit 4?