An investor can create the effect of leverage on his/her account by
A)buying equity of a levered firm.
B)investing in risk-free debt like T-bills.
C)borrowing on his/her own account.
D)buying equity of a levered firm and borrowing on his/her own account.

Question

Quizplus · Accepted Answer

Buying equity of a levered firm alone does not create leverage on the investor's account. Investing in risk-free debt like T-bills does not create leverage either. Borrowing on one's own account can create leverage, but the most effective way to create leverage is by both buying equity of a levered firm and borrowing on one's own account. This is because buying equity of a levered firm provides the potential for higher returns, while borrowing on one's own account amplifies the investor's gains (or losses) on that equity.

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