Omega ratio

The Omega ratio is a measure of risk of an investment asset, portfolio or strategy. It involves partitioning returns into loss and gain above and below a given threshold, the Ω ratio is then the ratio of the probability of having a gain by the probability of having a loss.

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 defining the gain versus the loss. The higher the ratio the better. To the contrary of the Sharpe ratio, where only the first two moments have an influence on the risk measure, the Ω ratio enables to take into account all moments of the distribution. The ratio was created by Keating and Shadwick^[1]

See also

• Post-modern portfolio theory
• Upside potential ratio
• Sharpe ratio
• Sortino ratio
• Modern Portfolio Theory

References

1. ^ Omega ratio