The Sharpe Ratio

I often hear clients discuss how they are earning 10%, 15% or even 20% on their investments. I tell them that is only half the story, the real story is what type of risk they are taking to earn that return. For example, I can invest money in a government bond that would earn 4% and be risk-free or a biotechnology company that has a return of 20%; which one is more likely to result in loss of my investment?.  When calculating the risk related to returns, I use the Sharpe Ratio. This ratio compares returns over their risk. I realize how much risk I am taking to obtain a certain return. The formula is expected return minus risk-free rate over the standard deviation of the investment.