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

Question

Quizplus · Accepted Answer

Leverage is the use of borrowed capital to increase the potential return of an investment. By borrowing money, an investor can increase the size of their investment and potentially earn a higher return. However, leverage also increases the risk of loss, as the investor is responsible for repaying the borrowed money even if the investment loses value.Options I and III are both ways to create leverage. By buying equity of an unlevered firm, the investor is essentially borrowing money from the firm to increase the size of their investment. By borrowing on his/her own account, the investor is borrowing money from a bank or other lender to increase the size of their investment.Option II is not a way to create leverage. Investing in risk-free debt like T-bills does not increase the size of the investor's investment or the potential return.

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