An investor can undo the effect of leverage on his/her own account by:
I. investing in the equity of a levered firm
II. by borrowing on his/her own account
III. by 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

Investing in the equity of a levered firm and investing in risk-free debt like T-bills are two ways an investor can undo the effect of leverage on their own account. By investing in the equity of a levered firm, an investor can earn returns from the company's leverage, essentially offsetting the leverage effect on their own account. Investing in risk-free debt like T-bills allows the investor to earn a fixed return, regardless of the market's fluctuations, which can also help to offset any negative impact of leverage on their account. However, borrowing on one's own account would only increase the level of leverage and would not undo its effects.

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