Leverage Extends The Spectrum
The use of leverage can extend the progression out even further. Examples of this include borrowing funds to invest in equities, or use of derivatives.
If leverage is used then there are two lines instead of one. This is because although one can invest at the risk-free rate, one can only borrow at an interest rate according to one's own credit-rating. This is visualised by the new line starting at the point of the riskiest unleveraged investment (equities) and rising at a lower slope than the original line. If this new line were traced back to the vertical axis of zero risk, it will cross it at the borrowing rate.
Read more about this topic: Risk-return Spectrum
Famous quotes containing the word extends:
“What is lawful is not binding only on some and not binding on others. Lawfulness extends everywhere, through the wide-ruling air and the boundless light of the sky.”
—Empedocles 484–424 B.C., Greek philosopher. The Presocratics, p. 142, ed. Philip Wheelwright, The Bobbs-Merrill Co., Inc. (1960)