The Quest Ram only spawns in the Quest Grove, which is a rare spawn in itself. If your Quest Grove doesn't have a Ram, wait a bit and overtime, it will spawn you one. Also, if you accidentally kill the quest ram it will not respawn, so be careful!
The Quest Ram is surrounded by stone blocks. Hidden within one of these, is the dispenser you must use to give him wool.
To complete the Quest Ram quest, you must give him one of each of the 16 colours of wool. You can do this by right clicking them on him, or dropping them in his mouth.
You need one each of Light Gray, Gray, Black, Red, Orange, Yellow, Lime, Green, Cyan, Light Blue, Blue, Purple, Magenta, Pink, Brown, and White Wool.
A good way to get these wool is using a Minium Stone to transmute whatever wool you have available into the proper colors.
Completing the Quest Ram quest will grant you 1 Gold Block, 1 Iron Block, 1 Diamond Block, 1 Lapis Lazuli Block, 1 Emerald Block, and a Crumble Horn.
The Crumble Horn has a low durability, but is a very interesting item. When used, it makes the sound of a Ram and crumbles all surrounding blocks, destroying some, turning stone to cobblestone, and turning stone brick into cracked stone brick.