Financial leverage increases the expected return and risk of the shareholder.

Question

Quizplus · Accepted Answer

Financial leverage, which involves borrowing money to invest in assets, increases the expected return of the shareholder by magnifying the gains from the investment. However, it also increases the risk of the shareholder because the losses are also magnified in case the investment does not perform well, and the shareholder must repay the borrowed funds with interest.

Financial Leverage Increases the Expected Return and Risk of the Shareholder