Leverage:
A)Reduces risk
B)Is synonymous with risk-free investment
C)Increases expected rate of return
D)Leads to smaller changes in the investment's price

Question

Quizplus · Accepted Answer

Leverage refers to the use of borrowed money or financial instruments to magnify potential returns. By taking on debt or using derivatives, an investor can increase the amount of money they control without having to put up the full amount in cash. This in turn can increase the expected rate of return, as the investor is amplifying the rewards for a given level of investment. However, this also increases risk, as losses can be magnified just as easily. It is important to note that leverage is not risk-free and that it can lead to larger price swings in an investment's value.