Jun
3

## Constructing 130/30 Portfolios with the Omega Ratio

**Constructing 130/30-Portfolios with the Omega ratio**is an interesting paper forthcoming in Journal of Asset Management by Gilli, Manfred, Schumann, Enrico, Di Tollo, Giacomo and Cabej, Gerda. Typical portfolio construction theory uses Markowitz efficient frontier under mean-variance framework to find an optimized portfolio, the authors in this paper construct portfolios with an alternative selection criterion, the Omega function.

Any portfolio return r can be decomposed into

define the downside and upside partial moments as follows

our objective is to minimize the below Omega ratio, a known performance measure, subject to additional constraints such as long short weights.

The authors apply this method to their data and conclude: the Omega function selected well-performing portfolios in terms of final wealth. These portfolios, however, exhibited a higher volatility when compared with naive mean variance method. Also the Omega-portfolios exhibited a favorable asymmetry in returns, and generally thinner tails than mean-variance-portfolios.

For detail please refer to the original paper downloadable at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1464798.

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