The Sharpe ratio measures how much return a portfolio earned for each unit of risk (volatility) it took. It is calculated as the return above a risk-free rate, divided by the volatility of returns.
Why it matters more than raw return
A 20% return sounds better than 14% — until you learn the first came with wild swings and the second was smooth. The Sharpe ratio puts them on equal footing by rewarding return *and* penalising volatility. A higher Sharpe means more reward for the risk taken. It is one of the most widely used measures of risk-adjusted performance.