Kappa: A Generalized Downside Risk-Adjusted Performance Measure

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The Sortino Ratio and the more recently developed Omega statistic are conceptually related “downside” risk-adjusted return measures, but appear distinct mathematically.  We show that each of these measures is a special case of Kappa, a generalized risk-adjusted performance measure.

Authors: Paul D. Kaplan, Ph.D., James A. Knowles

The Sortino Ratio and the more recently developed Omega statistic are conceptually related "downside" risk-adjusted return measures, but appear distinct mathematically.  We show that each of these measures is a special case of Kappa, a generalized risk-adjusted performance measure.  A single parameter of Kappa determines whether the Sortino Ratio, Omega, or another risk-adjusted return measure is generated.

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