What would be the impact of leverage on the expected return and standard deviation of purchasing an asset with 10% of the owner's funds and 90% borrowed funds?
What will be an ideal response?
We can use the general formula:
Leverage factor = Cost of Investment/ Owner's Contribution to the Purchase
In this case the leverage factor would be 10; so the expected return and the standard deviation would both increase by a factor of 10.
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What will be an ideal response?