The Danger of Leverage and Volatility

24 Pages Posted: 27 Mar 2013  

Robert Ferguson

AnswersToGo

Date Written: October 31, 1993

Abstract

High expected returns are attractive but are associated with high risk. Ultimately, risk shows up as volatility. Volatility is a fundamental feature of a business but can be increased through firm or investor leverage. Volatility without leverage significantly reduces long term return. Leverage and volatility combined can turn moderately poor returns into disasters and reduce long term return far more than is generally appreciated. Many investments with high expected returns have disappointing long term returns or appreciable chances of disaster.

Keywords: leverage, volatility, long-term return risk

JEL Classification: G11

Suggested Citation

Ferguson, Robert, The Danger of Leverage and Volatility (October 31, 1993). Available at SSRN: https://ssrn.com/abstract=2239827 or http://dx.doi.org/10.2139/ssrn.2239827

Robert Ferguson (Contact Author)

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6815 Edgewater Drve
Apt 208
Coral Gables, FL FL 33133
United States
7868974573 (Phone)

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