What is the Omega ratio?
It's a risk-return performance measure of an investment asset, strategy or portfolio, that was devised in 2002 by Con Keating and William Shadwick. It's defined as the probability weighted ratio of gains versus losses for a given return target.
Where have you heard about the Omega ratio?
You'll probably be familiar with the Omega ratio if you're a mathematician, or if you're acquainted with portfolio optimisation tools. It's not widely known outside these areas of activity, and financial journalists don't often write about it.
What you need to know about the Omega ratio.
Essentially, Omega is the ratio of upside returns relative to downside returns. The higher the Omega value, the greater the probability that a given return will be achieved or exceeded. The ratio is an alternative to the widely used Sharpe ratio, and is based on information the Sharpe ratio ignores.
By utilising a desired threshold return, the Omega ratio can be used to model risk for investors with widely differing requirements. The Omega ratio is considered to be especially valuable for non-normal investments such as hedge funds, options, futures and derivatives.