Optimal Strategies Under Omega Ratio

Working paper

30 Pages Posted: 5 Apr 2017 Last revised: 1 Apr 2018

See all articles by Carole Bernard

Carole Bernard

Grenoble Ecole de Management; Vrije Universiteit Brussel (VUB)

Steven Vanduffel

Vrije Universiteit Brussel (VUB)

Jiang Ye

Vrije Universiteit Brussel (VUB)

Date Written: February 14, 2018

Abstract

We study optimal investment strategies under the objective of maximizing the Omega ratio, proposed by Keating and Shadwick (2002) as an alternative to the Sharpe ratio for performance assessment of investment strategies. We show that in a standard set-up of the financial market the problem is ill-posed, i.e., maximizing the Omega ratio leads to excessive risk taking. By imposing additional restrictions we show that the Omega ratio maximizing strategy is still very risky and may coincide with the choice made by risk neutral investors. We conclude that caution is needed when using the Omega ratio for making asset allocation decisions.

Keywords: Portfolio choice, Omega ratio, ill-posedness

Suggested Citation

Bernard, Carole and Vanduffel, Steven and Ye, Jiang, Optimal Strategies Under Omega Ratio (February 14, 2018). Working paper. Available at SSRN: https://ssrn.com/abstract=2947057 or http://dx.doi.org/10.2139/ssrn.2947057

Carole Bernard (Contact Author)

Grenoble Ecole de Management ( email )

12, rue Pierre Sémard
Grenoble Cedex, 38003
France

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Steven Vanduffel

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
Brussels, Brabant 1050
Belgium

HOME PAGE: http://www.stevenvanduffel.com

Jiang Ye

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

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