In question 16 palme’s two final quesions. Can’t understand how are levered portfolio range of return are wider than unlevered if interest rates change, YC inverted and why is the levered portfolio return lower if interest rates don’t change
Levered portfolio=borrowing significant portfolio
You borrow long term to invest short term – inverted yield curve
If interest rates change, the returns range is broad – in IR inc, rtns inc; if fall, they fall
Otherwise, the range is not so broad compared to the range at start.
Leverage magnifies gains but also losses. That is both its purpose and its risk