Portfolio Selection and Omega as a Performance Measure
13 Pages Posted: 21 Jun 2004
Date Written: June 17, 2004
In this paper, we first develop a model by using the concept of Omega in the Risk-adjusted Return Theory. Since the theory quantifies an individual's return-risk relation and the Omega is a performance measure that takes into account all high moments of an asset returns, we are able to utilize the model to construct the efficient frontier of portfolios and make an optimal risk budgeting. This model is an asymmetric, multiple factor model. Its drawback is that it is difficult to determine the market portfolio. We propose alternative measures of return performance because of this drawback. After applying the measures in the Risk-Adjusted Return Theory, we can build new asset-pricing models. These models solve the problem while still having all features of the former model. In addition, we can easily tell how well to price an asset with these models.
Keywords: Omega, performance measure, asset pricing model, high moments, risk-adjusted return, market portfolio, efficient frontier
JEL Classification: C51, G11, G12, D81
Suggested Citation: Suggested Citation