Performance & Risk Metrics
Omega Ratio
A probability-weighted ratio of gains above a minimum acceptable return threshold to losses below that threshold, measuring excess return per unit of downside risk.
The Omega Ratio captures the whole return distribution, not just its first two moments. It divides probability-weighted gains above a minimum acceptable return (MAR) by probability-weighted losses below it. Unlike the Sharpe Ratio, which assumes returns are roughly normal, Omega makes no distributional assumption, so it is well suited to strategies with fat tails or skew.
One subtlety: the Omega Ratio depends entirely on the MAR you pick. Raise the threshold and the same return stream looks worse; lower it and the ratio climbs. When you compare two strategies on Omega, hold the MAR fixed, or the comparison is meaningless.
Formula
- MAR
- Minimum Acceptable Return threshold
- r
- Portfolio return
- f(r)
- Probability density function of returns