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The Journal of Wealth Management

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Article

Using a Z-score Approach to Combine Value and
Momentum in Tactical Asset Allocation

Peng Wang and Larry Kochard
The Journal of Wealth Management Summer 2012, 15 (1) 52-71; DOI: https://doi.org/10.3905/jwm.2012.15.1.052
Peng Wang
is a quantitative investment analyst at the Georgetown University Investment Office in Washington, DC.
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  • For correspondence: pw35@georgetown.edu
Larry Kochard
is the chief executive officer at the University of Virginia Investment Management Company in Charlottesville, VA.
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  • For correspondence: lkochard@virginia.edu
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Abstract

This article presents several active strategies for combining value and momentum strategies in a tactical asset allocation (TAA) framework. It refines the basic yield approach to valuation by standardizing the value signal using the Z-score. Such standardization not only enables the authors to directly compare valuation measures across asset classes but also offers insight about each asset class’s absolute valuation by its own standard. Under the nonlinear approach, it helps to identify market peaks and bottoms. It improves the momentum strategy by considering both relative and absolute performances. In the combined TAA model, this modification to momentum acts as a simple mechanism to adjust the importance of value and momentum strategies under different market conditions. The combined model takes advantage of both short-term momentum effects and long-term mean-reversion in valuation to achieve superior overall portfolio performance. Finally, it also provides alternative models for smaller tracking errors.

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The Journal of Wealth Management: 15 (1)
The Journal of Wealth Management
Vol. 15, Issue 1
Summer 2012
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Using a Z-score Approach to Combine Value and
Momentum in Tactical Asset Allocation
Peng Wang, Larry Kochard
The Journal of Wealth Management Apr 2012, 15 (1) 52-71; DOI: 10.3905/jwm.2012.15.1.052

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Using a Z-score Approach to Combine Value and
Momentum in Tactical Asset Allocation
Peng Wang, Larry Kochard
The Journal of Wealth Management Apr 2012, 15 (1) 52-71; DOI: 10.3905/jwm.2012.15.1.052
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  • Article
    • Abstract
    • DATA AND METHODOLOGY
    • THE TACTICAL ASSET ALLOCTION FRAKEWORK
    • MAIN RESULTS
    • CONCLUSION AND DISCUSSION
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