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.

Comparisons can be made with the commonly used Sharpe ratio which considers the ratio of return versus volatility.[2] 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". The Finance Development Centre Limited (UK).
  2. ↑ "Assessing CTA Quality with the Omega Performance Measure". Winton Capital Management (UK).

External links