An investor can undo the effect of leverage on his/her own account by
I.investing in the equity of an unlevered firm;
II.borrowing on his/her own account;
III.investing in risk-free debt like T-bills
A)I only
B)II only
C)III only
D)I and III above

Question

Quizplus · Accepted Answer

I is a correct choice because investing in the equity of an unlevered firm means that there is no debt involved and therefore no leverage, which would undo the effect of leverage on the investor's account.

II is not a correct choice because borrowing on one's own account would further increase leverage and worsen the effect.

III is also a correct choice because investing in risk-free debt like T-bills involves no risk of default and therefore no leverage effect.

An Investor Can Undo the Effect of Leverage on His/her