Chapter 3 Leverage and Risk Analysis: Maximizing Other People’s Money

The concept of “using other people’s money” is an appealing one. Many investors like to use margin accounts or even borrow money to build a portfolio. But an inescapable reality about leverage is that it comes with risk.

The correlation between potential profit and risk is a reality every investor needs to resolve. In determining your personal risk tolerance, a key issue is identification of the amount of risk you consider appropriate. That is determined by your income, assets, investing experience, family situation, and long-term goals. For example, if you are single and earning a high salary, own your home free and clear, and have a large cash reserve, you can afford to take ...

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