The larger the fraction of an investment financed by borrowing, the greater the potential for both profits and losses from that investment.

Question

Quizplus · Accepted Answer

When an investment is financed by borrowing, the investor is essentially leveraging their investment. This means that they are using borrowed funds to increase their potential returns. However, this also means that their losses can be magnified if the investment does not perform as expected. Therefore, the larger the fraction of an investment financed by borrowing, the greater the potential for both profits and losses from that investment.

The Larger the Fraction of an Investment Financed by Borrowing