Risk aversion vs. the Omega ratio: Consistency results

Sven Balder, Nikolaus Schweizer

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper clarifies when the Omega ratio and related performance measures are consistent with second order stochastic dominance and when they are not. To avoid consistency problems, the threshold parameter in the ratio should be chosen as the expected return of some benchmark – as is commonly done in the Sharpe ratio. When the ratio is below one, its value should be discarded – just like a negative Sharpe ratio. Finally, we show that a class of closely related performance measures has both better consistency properties and greater flexibility.
Original languageEnglish
Pages (from-to)78-84
JournalFinance research letters
Volume21
DOIs
Publication statusPublished - May 2017

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Risk aversion
Sharpe ratio
Performance measures
Benchmark
Second-order stochastic dominance
Expected returns

Keywords

  • performance measurement
  • Stochastic dominance
  • Omega ratio
  • Sharpe ratio

Cite this

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Risk aversion vs. the Omega ratio : Consistency results. / Balder, Sven; Schweizer, Nikolaus.

In: Finance research letters, Vol. 21, 05.2017, p. 78-84.

Research output: Contribution to journalArticleScientificpeer-review

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