Definition of Sharpe (or reward-to-volatility) measure
The Sharpe (or reward-to-volatility) measure is the ratio of Portfolio 's Risk Premium to the portfolio's standard deviation (Standard deviation = volatility = risk). So the Sharpe ratio measures the efficiency of the portfolio.
For a risk free asset the standard deviation and the risk premium would be zero. The reward-to-volatility measure quantifies the incremental reward for every 1% increase in the portfolio's standard deviation.
Suppose you have a portfolio with a risk premium of 7% and the standard deviation is 25%. In this instance the Sharpe measure would be 7/.25=.28
The higher the Sharpe measure the better the reward per unit increase of volatility (risk). The higher the Sharp measure the more efficient the portfolio is. Portfolios are sometimes ranked by their Sharpe Measure. This is called a mean-variance analysis.
The Sharpe measure is only useful for diversified portfolios and should not be used for individual assets.