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Omega is a performance measure that take all information about the return distribution of an asset into account. It is used in many areas, but rarely in portfolio optimization because of the complexity in such computations. In this paper, the authors propose a new measure, called Portfolio Omega, which can be easily used in portfolio optimization.
Authors: Mark Hooker, Ph.D., State Street Global Advisors and George Xiang, Ph.D., State Street Global Advisors
Description
Omega is a performance measure that take all information about the return distribution of an asset into account. It is used in many areas, but rarely in portfolio optimization because of the complexity in such computations. In this paper, the authors propose a new measure, called Portfolio Omega, which can be easily used in portfolio optimization. They provide details about the new measure; diversification, loss threshold, and downside risk of a portfolio through an empirical example.
