8FIGURES
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Levered & Unlevered Returns
Investing can differ depending on whether the investor uses leverage or is limited to his own capital.
Without leverage, profit is generated solely from his own investments. This means that the return is directly proportional to changes in asset prices or dividends received. This approach is considered safer, because the investor does not risk losing more than he invested. At the same time, the growth rate of the portfolio is limited by the size of his own capital, and the effect of small market fluctuations is moderate.
With leverage, the investor attracts borrowed funds, increasing the volume of investments. This allows you to increase the potential return: even a small increase in the price of an asset gives a proportionally larger return on his own capital. However, this approach significantly increases the risks. A market fall of even a small amount can lead to large losses, sometimes exceeding the size of his own investments.
Thus, the use of leverage is suitable only for those investors who are ready to actively manage risk and have sufficient experience. Those who seek stability and predictable income are better off limiting themselves to investments without borrowed funds.
levered vs unlevered
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