What is the connection between the financial leverage and the risk?
The act itself in solving the lever effect on the investment is in fact a presentation of the risk for the transaction. The risk is that if there is a loss, the deficit increases on the basis of the ratio of the lever effect or debt, added to the trade. Likewise, if the store is successful, the rewards are similarly reinforced. Investors use business strategies that determine the association or the relationship between financial leverage and risk.
The financial lever effect and risk are connected to each other. In the Financial Services arena, the location of the lever effect on a transaction such as betting, that shares will proceed or refuse, it should borrow from a broker to potentially increase revenues or profits, in the store. The ratio of the financial leverage and risks can be determined on the basis of the size of the loan in relation to the value of the total assets under the investor's supervision.
Hedge funds, which are slightly regulated investment means operated by professionals, are frequent vapors to accumulate lever eFEKT and subsequently risk to shops. The managers of these funds often rely on the main brokers to borrow shares when carrying out investment transactions. The number of shares that are extended by a broker can be based on the amount of money that Hedge fund manager oversees in addition to policies that could be part of the brokerage organization. Historically larger hedge funds use the most financial levers compared to smaller funds.
The financial lever effect and risk are not limited to a side that trades, such as a securing fund. If the transaction deteriorates and the hedge fund is unable to repay the borrowed amount, the main broker will expose himself to the loss. Prime Brokers usually go to a large extent to explore the history of the client's performance and access to capital, also known as liquidity, before lending shares to protect THZE loss.
also in the game is the type of strategy monitored by the Hedge Fund. WITHThe lever effect that two shares in different industries will be in the counter -remembrance instructions is more risky than betting that a few competing stocks will perform similar movements. This is because two shares in the same industry have a better chance of trading and compensating the other compared to a pair of securities in completely different segments of the economy.
The amount of financial leverage and risk is closely interconnected. For example, the larger the amount of debt added to the transaction, the higher and the greater the chance of loss. There are certain financial leverage conditions that are less uncertain than other, but the amount of risk that relates also depends on the experience and sophistication of the investor.