Leveraged Funds

Lesson

Leveraged funds are an alternative investment that uses borrowed money to amplify returns. Leveraged funds can be a powerful tool for investors, but they also come with increased risk due to the potential for amplified losses.

Practice Question #1

Which of the following investment vehicles typically uses leverage to amplify returns?

A) Mutual Funds

B) Index Funds

C) Leveraged ETFs

D) Dividend Stocks

Select an option above to see an explanation here.

A) Mutual Funds typically do not use leverage. B) Index Funds typically do not use leverage. C) Leveraged ETFs use leverage to amplify the returns of an underlying index. D) Dividend Stocks typically do not involve leverage.

Terms

Leveraged Funds:: Investment funds that use borrowed money to increase potential returns.
Leveraged Buyout (LBO):: The acquisition of a company using a significant amount of borrowed money.

Practice Question #2

What is a potential risk associated with using leverage in an investment?

A) Lower returns

B) Amplified losses

C) Reduced diversification

D) Lower volatility

Select an option above to see an explanation here.

A) Leverage is used to increase potential returns, not lower them. B) Leverage can amplify losses as well as gains. C) Leverage does not directly impact diversification. D) Leverage typically increases volatility, not lowers it.

Real-World Example

An investor decides to invest in a leveraged ETF that aims to provide twice the daily return of the S&P 500 index. For example, if the index goes up by 2% in a day, the leveraged ETF will aim to provide a return of 4%. However, if the index goes down by 2%, the leveraged ETF would experience a loss of 4%.

Practice Question #3

Which of the following is a financial ratio that compares a company's debt to its shareholders' equity?

A) Price-to-Earnings Ratio

B) Current Ratio

C) Debt-to-Equity Ratio

D) Dividend Yield

Select an option above to see an explanation here.

A) Price-to-Earnings Ratio compares a company's stock price to its earnings per share. B) Current Ratio compares a company's current assets to its current liabilities. C) Debt-to-Equity Ratio compares a company's debt to its shareholders' equity. D) Dividend Yield is the annual dividend payment divided by the stock's current market price.