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 funds to invest in assets, with the aim of increasing the potential return. It amplifies both gains and losses, which means that it also increases risk. However, by increasing the expected rate of return, leverage can also enhance the potential rewards of an investment. Therefore, option C is the correct choice. Option A is incorrect as leverage actually increases risk. Option B is incorrect as no investment can be entirely risk-free. Option D is partly true, as leverage can lead to smaller changes in the investor's own equity, but it does not necessarily affect the overall price of the investment.