• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
Finance Train

Finance Train

High Quality tutorials for finance, risk, data science

  • Home
  • Data Science
  • CFA® Exam
  • PRM Exam
  • Tutorials
  • Careers
  • Products
  • Login

Omega Index

Investment Management, Portfolio Management, PRM Exam, PRM Exam I

This lesson is part 2 of 2 in the course Risk and Risk Aversion

The Omega Index (or Omega ratio) was developed by Keating and Shadwick in 2002. It is a ratio of the upside variation in the portfolio and the downside variations of the portfolio. The returns of a portfolio are partitioned into losses and gains compared to a threshold value. The Omega ratio is then the ratio f the probability of gains and the probability of losses.

The ratio can be calculated using the following formula:

\Omega\left ( r \right ) = \frac{\int_{r}^{b}\left ( 1 - F\left ( x \right ) \right )dx}{\int_{a}^{r} F\left ( x \right )dx}

where (a,b) is the interval of returns and F is the cumulative distribution of returns.

For any return level r, the number Ω(r) is the probability weighted ratio of gains to losses, relative to the threshold r.

An advantage with the Omega Ratio is that unlike Sharpe ratio, the Omega index considers the whole distribution of returns and makes no assumption about investors’ utility function form. It employs all the information contained within the returns series. It can be used to rank and evaluate portfolios unequivocally. All that is known about the risk and return of a portfolio is contained within this measure. It might be considered a Sharper ratio, or the successor to Jensen’s alpha.

At any particular threshold r, the larger the Omega value, the higher the quality of the portfolio. The value of Omega is 1 when the threshold is set to the mean of the distribution. Secondly, whatever the threshold is, all investments may be ranked.

Previous Lesson

‹ Sortino Ratio

Next Lesson

›

Join Our Facebook Group - Finance, Risk and Data Science

Posts You May Like

How to Improve your Financial Health

CFA® Exam Overview and Guidelines (Updated for 2021)

Changing Themes (Look and Feel) in ggplot2 in R

Coordinates in ggplot2 in R

Facets for ggplot2 Charts in R (Faceting Layer)

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Primary Sidebar

In this Course

  • Sortino Ratio
  • Omega Index

Latest Tutorials

    • Data Visualization with R
    • Derivatives with R
    • Machine Learning in Finance Using Python
    • Credit Risk Modelling in R
    • Quantitative Trading Strategies in R
    • Financial Time Series Analysis in R
    • VaR Mapping
    • Option Valuation
    • Financial Reporting Standards
    • Fraud
Facebook Group

Membership

Unlock full access to Finance Train and see the entire library of member-only content and resources.

Subscribe

Footer

Recent Posts

  • How to Improve your Financial Health
  • CFA® Exam Overview and Guidelines (Updated for 2021)
  • Changing Themes (Look and Feel) in ggplot2 in R
  • Coordinates in ggplot2 in R
  • Facets for ggplot2 Charts in R (Faceting Layer)

Products

  • Level I Authority for CFA® Exam
  • CFA Level I Practice Questions
  • CFA Level I Mock Exam
  • Level II Question Bank for CFA® Exam
  • PRM Exam 1 Practice Question Bank
  • All Products

Quick Links

  • Privacy Policy
  • Contact Us

CFA Institute does not endorse, promote or warrant the accuracy or quality of Finance Train. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Copyright © 2021 Finance Train. All rights reserved.

  • About Us
  • Privacy Policy
  • Contact Us