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Questions tagged [leverage]

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14
votes
4answers
7k views

Sharpe ratio and leverage

Does leverage affect the Sharpe ratio? If my Sharpe is 2 at no leverage, does it change, fall by half say, at a different leverage?
14
votes
1answer
415 views

Max option leverage strike

Since options represent leveraged stock investments, at which strike $K$ does a European option provide maximum leverage? Hereby define leverage $L$ as ratio of Delta/Optionprice: $$L(K)=\frac{\...
9
votes
2answers
20k views

What is the “leverage effect” for stocks?

I've read the so-called "leverage-effect" for stocks models the fact that if a company is leveraged, its volatility should increase as the stock price moves lower and closer to the level of debt. Can ...
8
votes
1answer
328 views

What procedure do leveraged ETFs use to limit losses?

I've skimmed through more than one ETF prospectus trying to find the procedure for clamping losses at the limits of an ETF, and so far, no help. Has anyone found a description of the "clamping" ...
7
votes
3answers
4k views

How to calculate compound returns of leveraged ETFs?

Forewarning: this is a complete newbie question :-) I am starting to learn about ETFs by trying to do the numbers. When learning about the compounding effect in leveraged ETFs, I wanted to simulate ...
5
votes
4answers
490 views

In FX trading, is the risk for long positions higher than for short positions, or vice versa?

Having done FX trading as a hobby for nearly two years now (and having made some profit overall), I now have got a fundamental question which I think I already have the answer to, but I would like to ...
4
votes
2answers
904 views

How to trade leveraged ETFs

Leveraged ETFs (LETFs) are known to lose value over time due to the "volatility decay" effect. What're the most common strategies for trading LETFs to take advantage of this volatility effect? Also, ...
4
votes
1answer
738 views

Calculating portfolio VaR for (custom) leveraged products

I have been searching online for a few days regarding how to calculate portfolio VaR for a portfolio consisting of leveraged products - but so far, I have not been able to come up with anything ...
4
votes
1answer
194 views

Why does rebalancing leveraged portfolios buy winners and sell losers?

From "Diversification Return and Leveraged Portfolios" by EDWARD QIAN at http://www.master272.com/finance/memoire_2016/qian_diversification_return.pdf Consider again a two-asset 200/100 portfolio ...
4
votes
1answer
3k views

What does leverage cost?

Let's say I've developed a strategy that always outperforms the S&P-500, let call it the "magic strategy". Now I should be golden. All I need is to always have the S&P shorted with the same ...
3
votes
1answer
373 views

Should the Sharpe ratio of a portfolio change when it is leveraged?

I am trying to understand why the Sharpe ratio changes (increases) when I simulate leveraging my portfolio by multiplying all the time series of daily returns by a leverage factor (e.g. 5). I ...
3
votes
1answer
508 views

Measuring and proxies for leverage in the financial system

It can be argued that the leverage - reflected by how much collateral people or firms need to put down to borrow and might lose if they fail to pay the loan back - used in the financial system is one ...
3
votes
2answers
147 views

Are leveraged ETFs cheaper than using leverage?

Is using leveraged ETF cheaper than borrowing money and buying regular 1x ETF? Let's assume that we're rebalancing daily and interest rate for borrowing is something like 2.66% (taken from Interactive ...
3
votes
3answers
365 views

Leveraged and inverse leveraged ETFs - what is the exact defintion?

I just had a quick look at the daily returns for a few pairs of leveraged ETFs - it appears that the percent daily returns do not match perfectly. For instance, looking at FAS/FAZ, the returns for the ...
3
votes
1answer
283 views

what is a typical way forex brokerages can provide cheap leverage for their customers?

I'm not very well read in the area of high finance but I'm curious how forex brokerages are able to provide the backing for leverage that they can provide to customers. Is it possible to do this ...
3
votes
0answers
72 views

Does WACC not depend on the cost of debt?

According to chapter 17 of Ross's Corporate Finance (Brazilian translation of 2nd edition), $$ r_{WACC} = \frac{S}{S+B}r_S + \frac{B}{S+B}r_B(1 - T) $$ and $$ r_S = r_0 + \frac{B}{S}(1 - T)(r_0 - ...
3
votes
0answers
516 views

Optimal f (position sizing) without look ahead bias

My goal is to identify a systematic way to position sizing in the futures market. Let assume that I'm an investor with log utility. In addition, let assume that I'm reluctant in estimating the ...
2
votes
2answers
928 views

Implementing leveraged Risk Parity Portfolio using Direxion 3X ETF

The "common man" version of a leveraged Risk Parity portolio (40% stocks and 60% long term bond, Quarterly Rebalanced) can now be easily implemented using the 3X leveraged ETF's (UPRO=stocks, TMF=...
2
votes
3answers
177 views

What does it mean for an option strategy to be leveraged

Probably a newbie question, but what do traders mean when they say that an option strategy is leveraged ? And when can we say that it is the case ?
2
votes
1answer
375 views

Why use leverage when it does not improve the risk/reward ratio? [closed]

Leverage will increase gains when things go right but will also increase losses when things go wrong. Mathematically speaking, it does not change the risk/reward ratio (or does it?). Since investing/...
2
votes
1answer
105 views

What does leverage have to do with beta? [closed]

Given a portfolio $P$ with return $R$ and market-beta $\beta$, we have $$E (R - R_f) = \beta (E R_M - R_f)$$ Now, what does leveraging $P$ have to do with $\beta$? How it is affected if we leverage ...
2
votes
2answers
497 views

Leveraged Permanent Portfolio Using ITM Call Options

The permanent portfolio proposed by Harry Browne has had an excellent track record since the 1970's. It is able to compound at roughly 8% annually with a Sharpe ratio around 0.7. The permanent ...
2
votes
2answers
71 views

Leverage on ETF the same effect as on portfolio?

While we know that leveraged ETFs do decline in value to zero given infinity, can we also say the same with our portfolio value if we use leverage in our trading activity and seeing our portfolio ...
2
votes
0answers
74 views

What does leverage lower than 1 means for ETFs

I've recently noticed in my IB terminal that many ETFs have leverage lower than 1. I understand that some ETFs have leverage higher than 1 for example TQQQ because ...
2
votes
0answers
2k views

How exactly does “arranged financing” work?

Prime brokers offer what is called "arranged financing" which allows hedge funds to gain maximum leverage - more than allowed under the Portfolio Financing platform. I understand there is an element ...
2
votes
0answers
83 views

Why do leveraged and inverse leveraged WTI ETNs have this price relationship?

UWTI: 3x leveraged exposure to WTI DWTI: 3x leveraged inverse exposure to WTI The inverse relationship between these two symbols seems to trend toward the origin on a log-log plot (using log base 2)....
2
votes
0answers
61 views

Collateralized Loan Obligation - reliable source of information

Can someone provide me with some reliable source of information about CLOs? Especially some scientific articles etc. Google or wiki are good for starters and I would like to get some examples, ...
1
vote
1answer
274 views

Why does the Sharpe ratio not change when the strategy is leveraged?

It has been correctly stated that the Sharpe ratio of a strategy does not change when it is leveraged. I understand Eric's point that leveraging by $n$ multiplies both the return $x$ and volatility $\...
1
vote
1answer
93 views

How to reason about leverage in terms of elasticity

Return of an investment for a given period is by definition: $$r = \frac{P}{W_0} - 1$$ where $P$ is the price of the investment at the end of the period, and $W_0$ is the initial investment. I want ...
1
vote
1answer
114 views

Leverage constraints

I am trying to complete my project on Mean-Variance Leverage Optimization, and I have found lots of helpful advice on this forum. I wanted to ask you if you have some idea on how to implement a ...
1
vote
0answers
71 views

How to calculate leveraged ETF rebalancing?

So let's say that we have a market-cap weighted ETF (free-floating shares) that tracks an index comprised of stocks A and B. Stock A has a share price of $$10 and there are 100 outstanding shares and ...
1
vote
1answer
39 views

How to compute the Net Leverage Ratio for a mortgage [closed]

In the introduction to the 4th video of lectures series Finance I on MIT Opencurseware (https://www.youtube.com/watch?time_continue=166&v=hyc8h5T76BE), Andrews Lo talks about the net leverage ...
1
vote
0answers
30 views

Running regression to analyse how leverage changes around

I am running a single variable regression with BHAR returns as independent variable and Leverage as dependent variable. I would like to analyse does the leverage 1 year prior to IPO and 1 year after ...
1
vote
0answers
75 views

Long Term investment in leveraged ETFs not necessarily bad?

I have conducted very much research about leveraged ETFs lately. Most sources specifically say that these instruments are not meant for long-term investments and that they are very risky due to the ...
1
vote
0answers
319 views

How can factor certificates achieve constant leverage?

How does a bank which offers a factor certificate with unlimited maturity, e.g. a certificate which promises the holder to change in value in a constant proportion with respect to a change in the ...
0
votes
1answer
62 views

What is the source of the money in a leverage transaction?

An example: I have 1000 dollars, the leverage is 10x, and one stock is 10$. In casual situation I could buy 100 stocks, because I have 1000 dollars, but if I use the leverage I can buy 1000 stocks. I ...
0
votes
1answer
76 views

Do I need that extra cash to exercise call or put options?

Suppose I buy certain number of at-the-money call or put options, and if I want to exercise those options before the expiry date, then do I need to have the cash needed to buy the entitled amount of ...
0
votes
2answers
791 views

How does tranching cause leverage?

I've read that leverage is created with the tranches of a CDS index because the more junior tranches have more risk than the index. I get that the more junior the tranche the more the risk, but I don'...
0
votes
1answer
62 views

Data on banks’ leverage

Does someone know free resources to estimate the leverage of the banking and financial sector at an aggregate level? In particular I would be interested in something like Federal Reserve’s Flow of ...
0
votes
1answer
67 views

How to programmatically define financial leverage?

Financial leverage could be easily described as the tool that allows traders to multiply returns at the cost of multiplying also the risk involved in every trade. So, for instance, if a stock today ...
0
votes
1answer
145 views

The leverage effect for futures contract

Given the daily price data of equity and government-bond futures contracts, how can I identify the leverage effect (when prices move down, the volatility of prices increases), and see if it is ...
0
votes
1answer
107 views

Volatility of a leveraged CFD portfolio

I want to calculate the portfolio volatility (as a weighted average of the products) and the portfolio consists of CFD contracts with multipliers ranging from 10 to 50 depending on the underlying ...
0
votes
2answers
226 views

How does short selling affect the leverage of a portfolio?

I know that if you short a stock you borrow it from a broker, immediately sell it, and then buy it back at (hopefully) a lower price. But I don't understand how it impacts the leverage of a portfolio....
0
votes
1answer
84 views

positive financial leverage in real estate

I had the understanding that leverage always helped improve cash on cash returns so long as the interest paid was less than the unlevered rate of return/cap rate. doing a quick back of the envelope ...
0
votes
1answer
181 views

Leveraged ETF calculation - dropping below zero?

I'm running some simulations with a leveraged ETF to investigate that notorious leveraged-ETF decay effect I keep hearing about. When I put in a typical Black-Scholes lognormal model of returns on the ...
0
votes
1answer
34 views

Leverage and Tracking difference

I am a little confused. I have calculated the tracking difference of an Index and a n ETF using the return getting 0,4% tracking difference per year. I have then leveraged both, the Index and the ETF ...
0
votes
1answer
119 views

Simulated Sharpe Ratio Calculation for Leveraged Portfolio

I've written some VBA code to simulate the effect of borrowing money, investing it, and repaying the loan daily. PseduoCode: Start with a portfolio value of P = 1 Each day borrow P, invest 2*P, ...
0
votes
0answers
370 views

Examples of risk-seeking utility functions?

In the past, most literature assumed a risk-averse investor to model utility preferences. This includes the CRRA and CARA utility functions. In recent papers, researchers state that investors may be ...
-1
votes
2answers
86 views

Understanding Leverage specifically when there is loss [closed]

Leverage helps the trader to trade with more than what is available in the trader's account. Lets say I trade long 10 BTC/USD at 7000 USD using leverage of 1:10 (i.e i deposited 7000 USD). Now if the ...