What does leverage involve in investment?

What does leverage involve in investment?

• A. Investing without risk
• B. Using borrowed money
• C. Short-selling stocks
• D. Investing in only high-yield bonds

Answer: (B)

Leverage in investment specifically involves using borrowed money to increase the potential return on an investment. By borrowing funds, investors can purchase more assets than they would be able to buy using only their own capital. This amplifies both potential gains and potential losses. For example, if an investor uses leverage to amplify their investment in a stock and the stock performs well, the returns can be significantly higher compared to investing without leverage. However, it’s important to recognize that if the investment fails to perform, the losses can also be magnified, making leveraged investments riskier. In the context of the other options, investing without risk does not accurately define leverage, as all investments carry some degree of risk. Short-selling involves borrowing shares to sell them at the current market price and later repurchasing them at a lower price; while it is a strategy that may involve leverage, it does not encapsulate the broader definition of leverage itself. Investing only in high-yield bonds may imply a focus on high returns but does not involve the concept of borrowing funds to increase investment capacity. Thus, the essence of leverage is fully captured through the use of borrowed money to enhance investment exposure.

Leverage in investment specifically involves using borrowed money to increase the potential return on an investment. By borrowing funds, investors can purchase more assets than they would be able to buy using only their own capital. This amplifies both potential gains and potential losses. For example, if an investor uses leverage to amplify their investment in a stock and the stock performs well, the returns can be significantly higher compared to investing without leverage. However, it’s important to recognize that if the investment fails to perform, the losses can also be magnified, making leveraged investments riskier.

In the context of the other options, investing without risk does not accurately define leverage, as all investments carry some degree of risk. Short-selling involves borrowing shares to sell them at the current market price and later repurchasing them at a lower price; while it is a strategy that may involve leverage, it does not encapsulate the broader definition of leverage itself. Investing only in high-yield bonds may imply a focus on high returns but does not involve the concept of borrowing funds to increase investment capacity. Thus, the essence of leverage is fully captured through the use of borrowed money to enhance investment exposure.