Question

If an account valued at $1,000 is leveraged 5:1, a 10% drop in the value of invested assets would cause the value of the account to decrease by:

Answer 1

Answer:

A 10% drop in the value of invested assets would cause the value of the account to decrease by $500

Explanation:

Leverage is a way in which companies can use borrowed capital to use in an investment. The leverage stands to multiply the profits of the investments if the investment proves profitable, however if the investment registers a loss, the loss is also multiplied.

In our case;

Initial value of assets=$1,000

leverage=5:1

A 10% drop means;

Decrease in value of account before leverage=percentage drop×initial value of assets

Decrease in value of account before leverage=(10/100)×1,000=$100

If we apply a leverage of 5:1,

Account decrease after leverage=100×5=$500

A 10% drop in the value of invested assets would cause the value of the account to decrease by $500