The purpose is to calculate how much excess return will be generated by the total risk per unit of a portfolio. This ratio is based on the concept of capital market line (CML) and is the most common measurement ratio in the market. When the assets in the portfolio are all risky assets, the Sharp ratio applies. Sharp index represents that investors can get several points of return for each additional risk; If it is positive, it means that the fund's rate of return is higher than the risk of fluctuation; If it is negative, it means that the risk of fund operation is greater than the rate of return. In this way, each portfolio can calculate the Sharp ratio, that is, the ratio of return on investment to more risks. The higher the ratio, the better the portfolio.
For example, the yield of national debt is 3%, the expected yield of your portfolio is 15%, and the standard deviation of your portfolio is 6%. Then use 15%-3% to get 12% (representing the income other than your risk-free investment), and then use 12%.