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Optimizing the Omega ratio using linear programming

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  • Michalis Kapsos
  • Steve Zymler
  • Nicos Christofides and Berç Rustem

Abstract

ABSTRACT The Omega ratio is a recent performance measure. It captures both the downside and upside potentials of the constructed portfolio, while remaining consistent with utility maximization. In this paper, a new approach to compute the maximum Omega ratio as a linear program is derived. While the Omega ratio is considered to be a nonconvex function, the authors show an exact formulation in terms of a convex optimization problem and transform it as a linear program. The convex reformulation for the Omega ratio maximization is a direct analog of the mean-variance framework and the Sharpe ratio maximization.

Suggested Citation

  • Michalis Kapsos & Steve Zymler & Nicos Christofides and Berç Rustem, . "Optimizing the Omega ratio using linear programming," Journal of Computational Finance, Journal of Computational Finance.
    • Handle: RePEc:rsk:journ0:2347959
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