Omega Ratio
The Omega ratio is a risk-return performance measure used in finance to evaluate the probability-weighted gains relative to losses. Unlike traditional performance measures such as the Sharpe ratio, which only considers returns above a certain threshold (often the risk-free rate), the Omega ratio evaluates all possible returns, making it a comprehensive tool for assessing investment performance. Higher Omega ratios indicate better risk-adjusted returns.
Example
An investment portfolio with an Omega ratio of 2.5 has a higher ratio of probability-weighted gains to losses compared to another portfolio with an Omega ratio of 1.8, making it more attractive to risk-averse investors.
Key points
• A risk-return performance measure that evaluates probability-weighted gains relative to losses.
• Provides a comprehensive assessment of an investment's performance across all possible returns.
• A higher Omega ratio indicates better risk-adjusted returns.
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