*Sortino Ratio: Calculation Steps *

**Calculating the Sortino Ratio is not too difficult assuming you have historical data for the Internal Rate of Return (IRR) of the portfolio and the IRR for a benchmark. Here at ITA Wealth Management our primary benchmark is Vanguard's Total Market Index Fund, or VTSMX. Eventually we plan to move to the ITA Index, a customized benchmark for each portfolio.**

**In Sortino's early work, he used the term, minimum acceptable return (MAR). In his more recent work, MAR is now referred to as Desired Target Return**™**, a more meaningful expression.
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**Here is the Sortino equation.**

**SR = (Portfolio IRR – DTR**™**)/DR where DR is the downside risk or semivariance.**

**The following steps outline how an investor determines the Sortino Ratio.**

**1. Subtract DTR**™** from the Internal Rate of Return of the portfolio for each period. The question immediately arises as to what period to use. My recommendation is to go with a monthly period as that is what was advised by the authors of Captool, a software program I still use with several portfolios. Step #1 will give you the value of the numerator of the Sortino Ratio. The following steps will determine DR or the Downside Risk.**

**2. If the calculation for step #1 is negative, record the value. If the value is positive, set it equal to zero. We are only interested in volatility to the downside.**

**3. Square all calculations found in step #2 including the zero values.**

**4. Sum or add all values found in step #3**.

**5. Divide the sum or total found in step #4 by the total number of periods. Divide by all periods including those where the value is zero. Example: If four values are zero and six are negative, divide the sum by ten, not six.**

**6. Take the square root of the value found in step #5.**

**There you have it. Now program those instructions into a special worksheet as we have done with the TLH spreadsheet.**

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