This presentation highlights some of the powerful advances in economic science.

1. A Fully Diversified Portfolio Quarterly: 1973-2010 Model Portfolio 5 Rebalanced annually. Barclays Capital data, formerly Lehman Brothers, provided by Barclays Bank PLC. The S&P data are provided by Standard & Poor’s Index Services Group. The Merrill Lynch Indices are used with permission; copyright 2011 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Dimensional Index data compiled by Dimensional. Emerging Markets Blended Index consists of 50% Fama/French Emerging Markets Index, 25% Fama/French Emerging Markets Small Cap Index, and 25% Fama/French Emerging Markets Value Index. Fama/French Emerging Markets, Fama/French Emerging Markets Value and Fama/French Emerging Markets Small Cap Index weightings allocated evenly between Dimensional International Small Cap Index and Fama/French International Value Index prior to January 1989 data inception. Dimensional International Small Cap Value Index weighting allocated to International Small Cap Index prior to July 1981 data inception. International Value weighting allocated evenly between International Small Cap and MSCI World ex USA Index prior to January 1975 data inception. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance. See cover page for additional information. S1920.7 Annualized Compound Return Annualized Standard Deviation Model Portfolio 1 9.47% 11.16% Model Portfolio 2 8.83% 10.23% Model Portfolio 3 9.74% 11.88% Model Portfolio 4 10.68% 11.81% Model Portfolio 5 11.65% 11.26% Barclays US Govt./Credit Bond Index S&P 500 Index BofA Merrill Lynch One-Year US Treasury Note Index US Small Cap Index US Large Value Index Targeted Value Index Intl. Large Index Intl. Small Index Intl. Large Value Index Intl. Small Value Index Emerging Markets Blended Index Model Portfolio 1 40% 60% Model Portfolio 2 60% 40% Model Portfolio 3 30% 40% 30% Model Portfolio 4 15% 40% 15% 15% 15% Model Portfolio 5 7.5% 40% 7.5% 7.5% 7.5% 6% 6% 6% 6% 6% Merrill Lynch One-Year US Treasury Note Index S&P 500 Index US Small Cap Index US Large Value Index Targeted Value Index International Large Index International Small Index International Large Value Index International Small Value Index Emerging Markets Blended Index

2. In US dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. US value and growth index data (ex utilities) provided by Fama/French. The S&P data are provided by Standard & Poor’s Index Services Group. CRSP data provided by the Center for Research in Security Prices, University of Chicago. International Value data provided by Fama/French from Bloomberg and MSCI securities data. International Small data compiled by Dimensional from Bloomberg, StyleResearch, London Business School, and Nomura Securities data. MSCI EAFE Index is net of foreign withholding taxes on dividends; copyright MSCI 2011, all rights reserved. Emerging markets index data simulated by Fama/French from countries in the IFC Investable Universe; simulations are free-float weighted both within each country and across all countries. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Small company risk: Securities of small firms are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Emerging markets risk: Numerous emerging countries have experienced serious, and potentially continuing, economic and political problems. Stock markets in many emerging countries are relatively small, expensive, and risky. Foreigners are often limited in their ability to invest in, and withdraw assets from, these markets. Additional restrictions may be imposed under other conditions. Foreign securities and currencies risk: Foreign securities prices may decline or fluctuate because of: (a) economic or political actions of foreign governments, and/or (b) less regulated or liquid securities markets. Investors holding these securities are also exposed to foreign currency risk (the possibility that foreign currency will fluctuate in value against the US dollar). Size and Value Effects Are Strong around the World Annual Index Data S1220.8 Average Return (%) Standard Deviation (%) Annualized Compound Returns (%) US Large Value S&P 500 US Large Growth US Small Value CRSP 6-10 US Small Growth Intl. Value Intl. Small MSCI EAFE Intl. Growth Emg. Markets Value Emg. Markets Small Emg. Markets “Market” Emg. Markets Growth US Large Capitalization Stocks 1927–2010 US Small Capitalization Stocks 1927–2010 Non-US Developed Markets Stocks 1975–2010 Emerging Markets Stocks 1989–2010 14.03 11.88 11.35 19.17 15.98 13.95 18.48 19.17 13.67 11.29 25.01 21.98 19.46 17.05 27.01 20.51 21.93 35.13 30.94 34.05 24.56 28.13 22.29 22.21 42.01 40.67 36.40 34.89

4. Five Factors Help Determine Expected Return Annual Average Returns 1927–2010 Equity factors provided by Fama/French. Fixed factors provided by Ibbotson Associates. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. S1270.2 Market Factor All Equity Universe minus T-Bills Size Factor Small Stocks minus Large Stocks BtM Factor High BtM minus Low BtM Maturity Factor LT Govt. minus T-Bills Default Factor LT Corp. minus LT Govt.

5. The Risk Dimensions Delivered July1926–December 2010 Periods based on rolling annualized returns. 715 total 25-year periods. 775 total 20-year periods. 835 total 15-year periods. 895 total 10-year periods. 955 total 5-year periods. Performance based on Fama/French Research Factors. Securities of small companies are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Mutual funds distributed by DFA Securities LLC. S1271.4 Value beat growth 100% of the time. Value beat growth 100% of the time. Value beat growth 99% of the time. Value beat growth 96% of the time. Value beat growth 86% of the time. US Value vs. US Growth OVERLAPPING PERIODS Value beat growth 100% of the time. Value beat growth 100% of the time. Value beat growth 95% of the time. Value beat growth 91% of the time. Value beat growth 82% of the time. Small beat large 96% of the time. Small beat large 83% of the time. Small beat large 78% of the time. Small beat large 68% of the time. Small beat large 60% of the time. US Small vs. US Large Small beat large 97% of the time. Small beat large 88% of the time. Small beat large 82% of the time. Small beat large 75% of the time. Small beat large 59% of the time.

6. The Risk Dimensions Delivered Based on rolling annualized returns. Rolling multi-year periods overlap and are not independent. This statistical dependence must be considered when assessing the reliability of long-horizon return differences. International Value vs. International Growth data: 133 overlapping 25-year periods. 193 overlapping 20-year periods. 253 overlapping 15-year periods. 313 overlapping 10-year periods. 373 overlapping 5-year periods. International Small vs. International Large data: 193 overlapping 25-year periods. 253 overlapping 20-year periods. 313 overlapping 15-year periods. 373 overlapping 10-year periods. 433 overlapping 5-year periods. International Value and Growth data provided by Fama/French from Bloomberg and MSCI securities data. International Small data compiled by Dimensional from Bloomberg, StyleResearch, London Business School, and Nomura Securities data. International Large is MSCI World ex USA Index gross of foreign withholding taxes on dividends; copyright MSCI 2011, all rights reserved. S1271.4 January 1975–December 2010 January 1970–December 2010 Small beat large 100% of the time. Small beat large 100% of the time. Small beat large 84% of the time. Small beat large 76% of the time. Small beat large 75% of the time. International Small vs. International Large Small beat large 100% of the time. Small beat large 97% of the time. Small beat large 82% of the time. Small beat large 78% of the time. Small beat large 78% of the time. Value beat growth 100% of the time. Value beat growth 100% of the time. Value beat growth 100% of the time. Value beat growth 100% of the time. Value beat growth 98% of the time. International Value vs. International Growth OVERLAPPING PERIODS Value beat growth 100% of the time. Value beat growth 100% of the time. Value beat growth 100% of the time. Value beat growth 100% of the time. Value beat growth 98% of the time.

11. Mutual Fund Expenses “ After costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar for any time period.” — William F. Sharpe, 1990 Nobel Laureate William F. Sharpe, “The Arithmetic of Active Management,” Financial Analysts Journal 47, no. 1 (January/February 1991): 7-9. Mutual fund expense ratios as of April 9, 2010. Asset weighting based on net assets as of December 31, 2008. Data provided by Morningstar, Inc. Passive funds are those coded by Morningstar as Index Funds. Average of All Funds Weighted Average, Based on Fund Assets Active Passive Domestic Mutual Fund Expense Ratios Average of All Funds Weighted Average, Based on Fund Assets Average of All Funds Weighted Average, Based on Fund Assets Active Passive Average of All Funds Weighted Average, Based on Fund Assets International Mutual Fund Expense Ratios S1420.5

13. The Limits of Fund Rating Services Funds A, B, C, and D are actual funds. They are not identified because the purpose of this illustration is to emphasize that ratings, by themselves, do not provide enough information to make a sound investment decision. Morningstar: Five stars is highest rating; one star is lowest rating. US News & World Report: 100 is highest rating; 1 is lowest rating. S1440.1 Fund A Fund B Fund C Fund D Morningstar (Dec 2000) Forbes (Dec 2000) C A A+ D US News & World Report (Dec 2000) 34 50 10 93 Wall Street Journal (Jan 2001) E C A B BusinessWeek (Jan 2001) A No Rating B+ C

14. Innovations in Finance S1610.2 The Birth of Index Funds John McQuown, Wells Fargo Bank, 1971; Rex Sinquefield, American National Bank, 1973 Banks develop the first passive S&P 500 Index funds. Efficient Markets Hypothesis Eugene F. Fama, University of Chicago Extensive research on stock price patterns. Develops Efficient Markets Hypothesis, which asserts that prices reflect values and information accurately and quickly. It is difficult if not impossible to capture returns in excess of market returns without taking greater than market levels of risk. Investors cannot identify superior stocks using fundamental information or price patterns. Single-Factor Asset Pricing Risk/Return Model William Sharpe Nobel Prize in Economics, 1990 Capital Asset Pricing Model: Theoretical model defines risk as volatility relative to market. A stock’s cost of capital (the investor’s expected return) is proportional to the stock’s risk relative to the entire stock universe. Theoretical model for evaluating the risk and expected return of securities and portfolios. The Role of Stocks James Tobin Nobel Prize in Economics, 1981 Separation Theorem: 1. Form portfolio of risky assets. 2. Temper risk by lending and borrowing. Shifts focus from security selection to portfolio structure. “ Liquidity Preference as Behavior Toward Risk,” Review of Economic Studies, February 1958. Conventional Wisdom circa 1950 “ Once you attain competency, diversification is undesirable. One or two, or at most three or four, securities should be bought. Competent investors will never be satisfied beating the averages by a few small percentage points.” Gerald M. Loeb, The Battle for Investment Survival, 1935 Analyze securities one by one. Focus on picking winners. Concentrate holdings to maximize returns. Broad diversification is considered undesirable. 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 Diversification and Portfolio Risk Harry Markowitz Nobel Prize in Economics, 1990 Diversification reduces risk. Assets evaluated not by individual characteristics but by their effect on a portfolio. An optimal portfolio can be constructed to maximize return for a given standard deviation. Investments and Capital Structure Merton Miller and Franco Modigliani Nobel Prizes in Economics, 1990 and 1985 Theorem relating corporate finance to returns. A firm’s value is unrelated to its dividend policy. Dividend policy is an unreliable guide for stock selection. Behavior of Securities Prices Paul Samuelson, MIT Nobel Prize in Economics, 1970 Market prices are the best estimates of value. Price changes follow random patterns. Future share prices are unpredictable. “ Proof That Properly Anticipated Prices Fluctuate Randomly,” Industrial Management Review, Spring 1965. First Major Study of Manager Performance Michael Jensen, 1965 A.G. Becker Corporation, 1968 First studies of mutual funds (Jensen) and of institutional plans (A.G. Becker Corp.) indicate active managers underperform indices. Becker Corp. gives rise to consulting industry with creation of “Green Book” performance tables comparing results to benchmarks. Options Pricing Model Fischer Black, University of Chicago; Myron Scholes, University of Chicago; Robert Merton, Harvard University Nobel Prize in Economics, 1997 The development of the Options Pricing Model allows new ways to segment, quantify, and manage risk. The model spurs the development of a market for alternative investments.

15. Innovations in Finance S1610.2 Variable Maturity Strategy Implemented Eugene F. Fama With no prediction of interest rates, Eugene Fama develops a method of shifting maturities that identifies optimal positions on the fixed income yield curve. “ The Information in the Term Structure,” Journal of Financial Economics 13, no. 4 (December 1984): 509-28. Multifactor Asset Pricing Model and Value Effect Eugene Fama and Kenneth French, University of Chicago Improves on the single-factor asset pricing model (CAPM). Identifies market, size, and “value” factors in returns. Develops the three-factor asset pricing model, an invaluable asset allocation and portfolio analysis tool. “ Common Risk Factors in the Returns on Stocks and Bonds,” Journal of Financial Economics 33, no. 1 (February 1993): 3-56. A Major Plan First Commits to Indexing New York Telephone Company invests $40 million in an S&P 500 Index fund. The first major plan to index. Helps launch the era of indexed investing. “ Fund spokesmen are quick to point out you can’t buy the market averages. It’s time the public could.” Burton G. Malkiel, A Random Walk Down Wall Street, 1973 ed. International Size Effect Steven L. Heston, K. Geert Rouwenhorst, and Roberto E. Wessels Find evidence of higher average returns to small companies in twelve international markets. “ The Structure of International Stock Returns and the Integration of Capital Markets,” Journal of Empirical Finance 2, no. 3 (September 1995): 173-97. The Size Effect Rolf Banz, University of Chicago Analyzed NYSE stocks, 1926-1975. Finds that, in the long term, small companies have higher expected returns than large companies and behave differently. Integrated Equity Eugene F. Fama and Kenneth R. French Increasing exposure to small and value companies relative to their market weights and integrating the portfolio across the full range of securities may reduce the turnover and transaction costs normally associated with forming an asset allocation from multiple components. “ Migration,” CRSP Working Paper No. 614, Center for Research in Security Prices, University of Chicago, February 2007. 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Nobel Prize Recognizes Modern Finance Economists who shaped the way we invest are recognized, emphasizing the role of science in finance. William Sharpe for the Capital Asset Pricing Model. Harry Markowitz for portfolio theory. Merton Miller for work on the effect of firms’ capital structure and dividend policy on their prices. Database of Securities Prices since 1926 Roger Ibbotson and Rex Sinquefield, Stocks, Bonds, Bills, and Inflation An extensive returns database for multiple asset classes is first developed and will become one of the most widely used investment databases. The first extensive, empirical basis for making asset allocation decisions changes the way investors build portfolios.

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