An Investigation into Performance Rankings of the Omega Ratio vs the Sharpe Ratio Applied to South African General Equity Unit Trusts

Establishing The Relative Competitiveness Of South African Banking Shares: A Kalman Filter Approach

“…This is because measures only the dispersion of returns around its historical average and penalises positive and negative deviations from the historical average in a similar manner (Lhabitant, 2004). This implies that and products thereof (referring to standard deviation and beta) are unable to differentiate between downside and upside risk and thus penalise positive returns (De Wet, Krige & Smit, 2008;Harding, 2002), which also mean that they fail to capture downside surprise (Lamm, 2003). These arguments are further emphasised by Amenc, Martellini and Sfeir (2004:2), who stated that traditional performance measures, which incorporates these risk measures as denominators, can easily be manipulated when seeking returns in "nonnormal risks", like extreme liquidity and credit risk and volatility variation risks.…”

“…In order to overcome several of the limitations posed by the Sharpe ratio, this paper will also consult the Omega ratio (Keating & Shadwick, 2002), which treats upside and downside risk differently, thus "heeding" the criticism of the mean-variance portfolio optimisation of Markowitz (Gilli, Schumann, Di Tollo & Cabej, 2011:95). The Omega ratio also includes all the information that are encoded in the moments (namely, variance, mean, skewness, & kurtosis) (Togher & Barsbay, 2007); it does not require any assumptions about any moments (De Wet, Krige & Smit, 2008); and thus no assumptions are required on the utility function of an investor (Favre-Bulle & Pache, 2003). The Omega ratio is, therefore, beneficial as it considers both the upside potential (higher partial moments) and downside potential (lower partial moments) of an investment over the entire distribution (Kazemi, Schneeweis & Gupta, 2003), whereas popular ratios like the Sortino ratio (see Sortino & Price, 1994) and the Calmar ratio (see Young, 1991) consider only the lower partial moments (downside risk & maximum drawdown, respectively).…”

A Risk-Adjusted Evaluation Of The JSE Top 40 As An International Investment Option

“…Although the standard deviation proves sufficient in some instances it can easily be manipulated by seeking returns in "nonnormal risks", like extreme liquidity, credit risk and volatility variation risks (Amenc, Martellini & Sfeir, 2004:2). Another important limitation is that it does not differentiate between upside risk and downside risk, thus also penalising positive returns (De Wet, Krige & Smit, 2008). Thirdly, the Sharpe ratio operates independently of any fund benchmark in estimating excess returns, making the evaluation of some portfolios difficult (Amenc, Martellini & Sfeir, 2004).…”