Which Statement Is Correct About Financial Leverage

question 48

Multiple Choice

Which statement is correct about financial leverage?

• A)Leverage can increase an investor's returns but also increases the risk of loss.
• B)Leverage can decrease an investor's returns and also decrease the risk of loss.
• C)Leverage decreases the payments that a company makes on an ongoing basis.
• D)Leverage decreases the debt level relative to a company's equity base.

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Definitions:

Natural Hedge

A transaction between two counterparties where both parties’ risks are reduced.

Derivatives Transaction

A financial agreement whose value is based on, or derived from, the value of an underlying asset or group of assets.

Arbitrage Profits

Profits generated from exploiting price differences of the same asset in different markets, buying low in one and selling high in another.

Risk Management

The process of identifying, assessing, and prioritizing risks followed by the application of resources to minimize, control, or eliminate them.