Managers Are Constantly Comparing the Costs of What Was Expected

question 85

Essay

Managers are constantly comparing the costs of what was expected to happen with the costs of what did happen. By examining the differences, or variances, managers can learn much valuable information. Identify and discuss the steps involved in variance analysis.

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Definitions:

Unsystematic Risk

The segment of risk that is unique to a specific company or industry, also known as diversifiable risk, which can be mitigated through diversification.

Diversification

Spreading a portfolio over many investments to avoid excessive exposure to any one source of risk.

Portfolio

A collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including mutual funds and ETFs.

Unique Risk

Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also called firm-specific risk, nonsystematic risk, or diversifiable risk.