{"id":2096853,"date":"2019-01-10T12:53:29","date_gmt":"2019-01-10T07:23:29","guid":{"rendered":"http:\/\/stockviz.biz\/index.php\/?p=2096853"},"modified":"2019-01-10T12:53:29","modified_gmt":"2019-01-10T07:23:29","slug":"the-omega-ratio","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2019\/01\/10\/the-omega-ratio\/","title":{"rendered":"The Omega Ratio"},"content":{"rendered":"<p>We are all aware of the Sharpe Ratio &#8211; the ratio between excess return and risk. Mathematically, it is <code>(average return - benchmark return)\/standard deviation of excess returns<\/code>. The main drawback of the Sharpe Ratio is that market returns have fat tails, skews and kurtosis. Numerous performance ratios have been proposed to take care of these &#8220;higher moments.&#8221; One of them is the Omega Ratio.<\/p>\n<p>The math is a bit hairy. I encourage inquisitive readers to go through Quantdare&#8217;s <a href=\"https:\/\/quantdare.com\/omega-ratio-the-ultimate-risk-reward-ratio\/\" rel=\"noopener\" target=\"_blank\">post<\/a> on this topic. It also has a link to the original paper. <\/p>\n<p>However, using R to calculate Omega is straightforward enough. Here is how a plot of rolling 5-year Omega of the S&amp;P 500 and NIFTY 50 Dollar indices looks like:<br \/>\n<a href=\"https:\/\/github.com\/stockviz\/blog\/raw\/master\/omega\/01\/OMEGA.%5EGSPC.NIFTY50%20USD.1991-01-01.2018-12-31.60.png\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/github.com\/stockviz\/blog\/raw\/master\/omega\/01\/OMEGA.%5EGSPC.NIFTY50%20USD.1991-01-01.2018-12-31.60.png\" width=\"3600\" height=\"1800\" alt=\"Omega of S&amp;P 500 and NIFTY 50 USD\" class=\"alignnone size-full\" \/><\/a><\/p>\n<p>Is it really a step up from the original Sharpe Ratio?<\/p>\n<p><a href=\"https:\/\/github.com\/stockviz\/blog\/raw\/master\/omega\/01\/Sharpe%20Ratio.%5EGSPC.NIFTY50%20USD.1991-01-01.2018-12-31.60.png\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/github.com\/stockviz\/blog\/raw\/master\/omega\/01\/Sharpe%20Ratio.%5EGSPC.NIFTY50%20USD.1991-01-01.2018-12-31.60.png\" width=\"3600\" height=\"1800\" alt=\"Sharpe Ratio of S&amp;P 500 and NIFTY 50 USD\" class=\"alignnone size-full\" \/><\/a><\/p>\n<p>Code and charts are on <a href=\"https:\/\/github.com\/stockviz\/blog\/tree\/master\/omega\/01\" rel=\"noopener\" target=\"_blank\">github<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>We are all aware of the Sharpe Ratio &#8211; the ratio between excess return and risk. Mathematically, it is (average return &#8211; benchmark return)\/standard deviation of excess returns. The main drawback of the Sharpe Ratio is that market returns have fat tails, skews and kurtosis. Numerous performance ratios have been proposed to take care of &hellip; <\/p>\n","protected":false},"author":2,"featured_media":2065851,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3471],"tags":[2761],"class_list":["post-2096853","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing-insight","tag-quant","entry"],"_links":{"self":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/2096853","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/comments?post=2096853"}],"version-history":[{"count":0,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/2096853\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media\/2065851"}],"wp:attachment":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media?parent=2096853"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/categories?post=2096853"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/tags?post=2096853"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}