Question

Leverage increases the risk of an investment because although borrowing may decrease/increase the potential return of an​ investment, in a market downturn a company may owe more/less than the value of the underlying asset.

Answer 1

Leverage increases the risk of an investment because although borrowing may increase the potential return of an investment in a market downturn a company may owe more than the value of the underlying asset

(Leverage is beneficial for a strategy when the returns are greater than the cost of borrowing,leverage usually increases returns,however if the strategy runs below the cost of borrowing it may arise a situation where company may owe more than the value of the underlying assets,which leads to losses to the investors)