Could Omega Ratio Perform Better than Sharpe Ratio?

19 Pages Posted: 21 Jun 2018 Last revised: 26 Sep 2018

See all articles by Xu Guo

Xu Guo

Beijing Normal University (BNU)

Haim Levy

Hebrew University of Jerusalem - Jerusalem School of Business Administration; Fordham University

Richard Lu

Feng Chia University

Wing-Keung Wong

Asia University, Department of Finance

Date Written: September 5, 2018

Abstract

In this paper, we will investigate whether there is any Sharpe ratio rule or Omega ratio rule that can be used to show that one asset outperforms another asset if it has a higher Sharpe ratio and/or Omega ratio. We find that Sharpe ratio rule could not detect preference of both risk averters and risk seekers in some strong dominance cases. We set up the Omega ratio rule and find that the Omega ratio rule is better than the mean-variance rule because the former could the former can detect the first order stochastic dominated asset but the latter cannot. We also show the superiority of the Omega ratio rule over any Sharpe ratio rule by using hedging funds data and discuss the advantage of using the Omega ratio rule to stochastic dominance rule.

Keywords: stochastic dominance, omega ratio, utility

JEL Classification: C0, D81, G10

Suggested Citation

Guo, Xu and Levy, Haim and Lu, Richard and Wong, Wing-Keung, Could Omega Ratio Perform Better than Sharpe Ratio? (September 5, 2018). Available at SSRN: https://ssrn.com/abstract=3198033 or http://dx.doi.org/10.2139/ssrn.3198033

Xu Guo

Beijing Normal University (BNU)

19 Xinjiekou Outer St
Haidian District
Beijing, Guangdong 100875
China

Haim Levy

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

HOME PAGE: http://pluto.huji.ac.il/~mshlevy/

Fordham University ( email )

140 West 62nd Street
New York, NY 10023
United States

Richard Lu

Feng Chia University ( email )

100 Wenhwa Road
Talchung
Taiwan

Wing-Keung Wong (Contact Author)

Asia University, Department of Finance ( email )

Taiwan
Taiwan

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