Leverage: friend or foe?

Although leverage played a leading role in the banking meltdowns that characterised the financial crisis, continuing to avoid it would be a mistake

leverage-seesaw

Borrowing and leverage are two related concepts that are often conflated, however each has distinct risks. Leverage refers to any technique to multiply the gains and losses on an investment. Borrowing is one way to achieve leverage, but you can borrow without levering and lever without borrowing. Keeping the terms straight is essential for evaluating risk.

Example 1: A simple tale…

The simple example of using leverage familiar to most involves borrowing money to buy more of an asset. For example

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

Register

Want to know what’s included in our free membership? Click here

This address will be used to create your account

Most read articles loading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here