The Omega Ratio is the probability-weighted ratio of returns above a threshold to returns below it — it captures the full return distribution without assuming normality, making it robust for non-normal return profiles.
Omega Ratio = [Probability-weighted gains above threshold] ÷ [Probability-weighted losses below threshold]. Unlike Sharpe Ratio (which assumes normal distribution) or Sortino (which focuses on downside deviation), Omega uses the entire return distribution and doesn't require any distributional assumptions. It essentially measures: for every ₹1 of expected loss below the threshold, how much expected gain above the threshold do you get? A ratio above 1.0 is desirable.
The Omega Ratio is like a weighted bet payoff: 'For every rupee I might lose below my target, how many rupees of gain above my target do I get in return?' If Omega = 1.5, for every ₹1 of downside risk, you have ₹1.50 of upside potential. Omega Ratio = 1.0 means break-even odds. Below 1.0 means bad odds — more downside risk than upside reward. Omega is superior to Sharpe for strategies with skewed or fat-tailed return distributions (options, absolute return funds).
Choose a threshold return (typically 0% or risk-free rate).
Calculate: Gains = integral of the complementary CDF above the threshold.
Losses = integral of the CDF below the threshold.
Omega = Gains ÷ Losses.
Omega > 1: favourable distribution (more expected gain than loss relative to threshold).