Silly question, but does the effect of leverage magnify equally potential gains and losses? Not necessarily in the same amounts or percentages, but that you take an inherently equal risk of higher gains and losses?
The discussion about leveraged returns in reading 25 (figure 1 in schweser specifically ) looks like the gains from leverage outweigh the potential losses from leverage. I know, however, that too much leverage can also result in losing everything.
you have $100, you lever it up so you have $200, one turn.
If you invest $200 and it goes up 50%, you have $300. Your return after payback is then $200/$100=100%
If you invest $200 and it goes down 50%, you have $100. Your return after payback is then $0/$100=-100%
So like a knife, cuts both ways. Not sure what that example is as I dont have material, perhaps you can post it.
Certainly can be assymetric in the fact that if you blow up and can’t repay then you are bankrupt, so really your loss is realistically limited, while your upside could be many times the amount…in that case, perhaps.
Fitting that you respond, Mr. Leverage. That makes sense. Many thanks for your help.
The only assymmetry is borrowing costs: they reduce your return whether it’s positive or negative.