You purchase a stock with cash, and you earn a negative return on the stock. If you had purchased the stock with 60 percent cash and 40 percent borrowed funds, your return on your investment would have been
A)positive.
B)more negative than if you had covered the entire investment with cash.
C)negative, but more favorable than if you had covered the entire investment with cash.
D)zero.

Question

Quizplus · Accepted Answer

When you purchase a stock with a combination of cash and borrowed funds (leveraging), and the stock's value decreases, the negative return is magnified because you still owe the borrowed amount plus any interest on it. Therefore, the return on your investment would be more negative than if you had used only cash, since you would not have the additional burden of repaying the borrowed funds.

You Purchase a Stock with Cash, and You Earn a Negative