Constructing 130/30-Portfolios with the Omega Ratio

Journal of Asset Management, Vol 12, No 2, pp. 94-108, 2011

17 Pages Posted: 1 Sep 2009 Last revised: 23 Jul 2011

See all articles by Manfred Gilli

Manfred Gilli

University of Geneva - Research Center for Statistics; Swiss Finance Institute

Enrico Schumann

Independent

Giacomo di Tollo

Ca Foscari University of Venice - Dipartimento di Economia

Gerda Cabej

University of Geneva

Date Written: August 31, 2009

Abstract

We construct portfolios with an alternative selection criterion, the Omega function, which can be expressed as the ratio of two partial moments of a portfolio’s return distribution. The main purpose of the paper is to investigate the empirical performance of the selected portfolios, especially the effects of allowing short positions. Many studies on portfolio optimisation assume that short sales are not allowed. This is despite the fact that theoretically, short positions can improve the risk-return characteristics of a portfolio, and practically, institutional investors can and do sell stocks short. We investigate whether removing the non-negativity constraint really improves out-of-sample portfolio performance under realistic assumptions, that is when optimal weights need to be estimated from the data and different transaction costs apply to long and short positions.

Keywords: Portfolio optimisation, 130/30-portfolios, Optimisation heuristics

JEL Classification: C61, C63, G11

Suggested Citation

Gilli, Manfred and Schumann, Enrico and di Tollo, Giacomo and Cabej, Gerda, Constructing 130/30-Portfolios with the Omega Ratio (August 31, 2009). Journal of Asset Management, Vol 12, No 2, pp. 94-108, 2011. Available at SSRN: https://ssrn.com/abstract=1464798

Manfred Gilli

University of Geneva - Research Center for Statistics ( email )

Geneva
Switzerland
+41223798222 (Phone)
+41223798299 (Fax)

HOME PAGE: http://www.unige.ch/ses/metri/gilli/

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Enrico Schumann (Contact Author)

Independent ( email )

No Address Available

Giacomo Di Tollo

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Gerda Cabej

University of Geneva ( email )

102 Bd Carl-Vogt
Genève, CH - 1205
Switzerland

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