Suppose investment A has a return of 100% in year one, and of 100% in year two.
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Question:
Suppose investment A has a return of 100% in year one, and of −100% in year two.
question 1. What is the return over the two years of investment A? Assume all returns are arithmetic returns.
question 2. Suppose investment B has a return of 50%. How much leverage do you need for the return on equity of investment B to replicate the return on investment A?
question 3. What is the return on equity on B using the leverage you found, assuming −100% return in year 1?
4. What does this tell you about use of leverage in investment?
Related Book For
The Economics Of The Environment
ISBN: 9780321321664
1st Edition
Authors: Peter Berck, Gloria Helfand
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