Omega Ratio

Definition

The Omega Ratio is a risk-adjusted metric that compares the probability-weighted gains to the probability-weighted losses relative to a threshold return. It provides insight into the likelihood of achieving a given return level while considering the shape of the return distribution.

Formula

$\text{Omega Ratio} = \frac{\sum (R_i > R_T)}{\sum (R_i < R_T)}$

Where:

• $R_i$ = individual returns
• $R_T$ = target return (threshold)
• The numerator sums the returns that are greater than $R_T$ (gains).
• The denominator sums the returns that are less than $R_T$ (losses).