1. What is Leveraged Return?

Leveraged return refers to the potential return on an investment when borrowed funds are used to amplify the investment position. It magnifies both gains and losses compared to an unleveraged position.

2. How Does the Calculator Work?

The calculator uses the Leveraged Return formula:

Where:

• \( \text{Asset Return} \) — Return on the underlying asset (%)
• \( \text{Leverage} \) — Leverage multiplier (decimal)
• \( \text{Borrowing Cost} \) — Cost of borrowed funds (%)

Explanation: The formula calculates the net return after accounting for both the amplified asset return and the cost of borrowing additional funds.

3. Importance of Leveraged Return Calculation

Details: Calculating leveraged return is crucial for investors using margin or leverage to understand the true profitability of their investments after accounting for borrowing costs and risk amplification.

4. Using the Calculator

Tips: Enter asset return as a percentage, leverage as a decimal (e.g., 2 for 2x leverage), and borrowing cost as a percentage. All values must be valid (leverage ≥ 1).

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good leveraged return?
A: A good leveraged return exceeds both the borrowing cost and the unleveraged return, indicating the leverage is adding value after costs.

Q2: How does leverage affect risk?
A: Leverage amplifies both potential gains and losses, increasing the risk profile of the investment significantly.

Q3: Can leveraged returns be negative?
A: Yes, if the asset return is lower than the borrowing cost, leveraged returns can be negative even with positive asset performance.

Q4: What are common leverage ratios used?
A: Common ratios range from 2x to 10x depending on the asset class and risk tolerance, with regulatory limits often applied.

Q5: How does compounding affect leveraged returns?
A: Compounding can significantly impact leveraged returns over time, as both gains and borrowing costs compound, creating exponential effects.