Portfolio Optimization with the Omega Ratio - Maple Application Center
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Portfolio Optimization with the Omega Ratio

: Maplesoft AuthorSamir Khan
Engineering software solutions from Maplesoft
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Traditional investment performance benchmarks, like the Sharpe Ratio, approximate the returns distribution with mean and standard deviation. This, however, assumes the distribution is normal. Many modern investments vehicles, like hedge funds, display fat tails, and skew and kurtosis in the returns distribution. Hence, they cannot be adequately benchmarked with traditional approaches.

One solution, proposed by Shadwick and Keating in 2002 is the Omega Ratio. This divides the returns distribution into two halves ? the area below a target return, and the above a target return. The Omega Ratio is simply the former divided by the latter. A higher value is better.

This application finds the asset weights that maximize the Omega Ratio of a portfolio of ten investments, given their simulated monthly returns and a target return.

This is a non-convex problem, and requires global optimizers for a rigorous solution. However, a transformation of the variables (only valid for Omega Ratios of over 1) converts the optimization into a linear program.

This application implements both approaches, the former using Maple's Global Optimization Toolbox, and the latter using Maple's linear programming features. For the data set provided in this application, both approaches give comparable results.

Application Details

Publish Date: March 02, 2016
Created In: Maple 2016
Language: English

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