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Risk aversion vs. the Omega ratio: Consistency results

Balder,Sven
; 
Schweizer,Nikolaus
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.
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Date
2017-05
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Tilburg University Research Output Collection
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Keywords
performance measurement, Stochastic dominance, Omega ratio, Sharpe ratio, G11 - Portfolio Choice ; Investment Decisions, D81 - Criteria for Decision-Making under Risk and Uncertainty
Citation
Balder, S & Schweizer, N 2017, 'Risk aversion vs. the Omega ratio : Consistency results', Finance research letters, vol. 21, pp. 78-84. https://doi.org/10.1016/j.frl.2016.12.012
URI
https://hdl.handle.net/20.500.14602/66208
License
info:eu-repo/semantics/closedAccess
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