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

Question

Quizplus · Accepted Answer

Investing in the equity of an unlevered firm will remove the leverage effect since the firm does not use debt financing. Investing in risk-free debt like T-bills will also help to offset the leverage effect since it is not affected by the fluctuations in the stock market. Therefore, investing in the equity of an unlevered firm and investing in risk-free debt like T-bills is the best choice to offset the leverage effect. Borrowing on one's own account will only add to the leverage effect and investing in the equity of a levered firm will only exacerbate the leverage effect.

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