Omega as a Performance Measure

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In a recent paper, Shadwick and Keating (2002b) presented a new measure of performance called Omega.  According to the authors, Omega was developed to overcome the inadequacy of many traditional performance measures when applied to investments that do not have normal return distributions.

Authors: Hossein Kazemi, Ph.D., Thomas Schneeweis and Bhaswar Gupta

In a recent paper, Shadwick and Keating (2002b) presented a new measure of performance called Omega.  According to the authors, Omega was developed to overcome the inadequacy of many traditional performance measures when applied to investments that do not have normal return distributions.  Unlike other measures of performance, Omega was developed with the intent of taking the entire return distribution into account. In this paper, we show that Omega is essentially the ratio of a call price to a put price.  This result has several implications as far as this measure of perforamance is concerned.  We also introduce a new measure Sharpe-Omega, which preserves all its features and is similar to the Sharpe Ratio and thus more intuitive.

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