Which statement(s) is/are TRUE? I. A leveraged account magnifies both gains and losses.
II) The risk of highly leveraged investments is that a small decrease in price can wipe out one's account.
III) Subprime mortgage packages were seen as low-risk investments, leading many investors to borrow money at the low prevailing interest rates to purchase greater quantities.

Question

Quizplus · Accepted Answer

I. Leveraged accounts do indeed magnify both gains and losses because they allow investors to control large positions with a relatively small amount of invested capital. II. The statement about the risk of highly leveraged investments is true; because leverage magnifies outcomes, a small decrease in the value of the investment can lead to significant losses, potentially wiping out the investor's account. III. Prior to the financial crisis of 2007-2008, subprime mortgage packages were often considered low-risk investments, which led many investors to leverage their investments, borrowing at low interest rates to buy more of these securities. This perception contributed to the housing bubble and subsequent financial crisis.

Which Statement(s) Is/are TRUE? I