Professor Eugene Fama may be the most important mind in the world of finance today. Most people have never heard of him. But they often know of him.
Today, October 14, 2013 he was awarded the Nobel Prize in Economics.
The Royal Swedish Academy of Sciences stated in a news release: “Beginning in the 1960s, Eugene Fama and several collaborators demonstrated that stock prices are extremely difficult to predict in the short run, and that new information is very quickly incorporated into prices. These findings not only had a profound impact on subsequent research but also changed market practice. The emergence of so-called index funds in stock markets is a prominent example.”
The Fama-French Three Factor Model provides a highly useful tool for understanding portfolio performance, measuring the impact of active management, portfolio construction and estimating future returns. The Three Factor Model has replaced Capital Asset Pricing Model (CAP-M) as the most widely accepted explanation of stock prices in the aggregate and investor returns.
The Efficient Market Hypothesis and 3-Factor Model are the founding blocks for those mutual funds offered by Dimensional Fund Advisors (DFA). In fact, Fama is on the board of directors, and heads up investment policy, for DFA. See Why DFA
Watch Professor Fama discuss the evolution of finance: