Omega ratio

The Omega Ratio is a risk-return performance measure of an investment asset, portfolio, or strategy. Devised by Keating & Shadwick in 2002, it is defined as the probability weighted ratio of gains versus losses for some threshold return target. [1]

Omega is calculated by creating a partition in the cumulative return distribution in order to create an area of losses and an area for gains relative to this threshold.

The ratio is calculated as:

\Omega(r) = \frac{\int_{r}^\infty (1-F(x))\,dx}{\int_{-\infty}^r F(x)dx}

Where F is the cumulative distribution function, r the threshold and partition defining the gain versus the loss. A larger ratio indicates that the asset provides more gains relative to losses for some threshold r and so would be preferred by an investor. When r is set to zero the Gain-Loss-Ratio by Bernardo and Ledoit arises as a special case.[2]

Comparisons can be made with the commonly used Sharpe ratio which considers the ratio of return versus volatility.[3] The Sharpe ratio considers only the first two moments of the return distribution whereas the Omega ratio, by construction, considers all moments.

See also

References

  1. ↑ Keating & Shadwick. "A Universal Performance Measure" (PDF). The Finance Development Centre Limited (UK).
  2. ↑ Bernardo, Antonio E.; Ledoit, Olivier (2000-02-01). "Gain, Loss, and Asset Pricing". Journal of Political Economy 108 (1): 144–172. doi:10.1086/262114. ISSN 0022-3808.
  3. ↑ "Assessing CTA Quality with the Omega Performance Measure" (PDF). Winton Capital Management (UK). line feed character in |work= at position 8 (help)

External links

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