The Sharpe ratio measures the performance of excess return (or risk premium) per unit of risk (volatility).This is done by taking the "asset return" less "the risk free rate of return" then dividing the result by volatility. The Sharpe number informs us of the assumed risk of an asset, indicating the payoff (excess return) per each unit of risk (volatility point).

The higher the ratio, the better the asset.

The formula: (asset return - risk free rate of return) / volatility