Leverage
Should a loan that one neither intends nor is required to repay be considered debt or equity?
What is risk parity? Is leverage an essential part of the strategy? How have risk strategies performed over time? Larry Cao, CFA, addresses these questions and highlights some of the most insightful readings on the subject.
Over the past two years, two teams of Financial Analysts Journal authors have been exchanging ideas through a series of articles and letters published in the FAJ.
The next credit cycle trough will challenge leveraged-credit investors in ways not seen during prior default surges.
If we define financial leverage as the process of borrowing capital to make an investment with the expectation that the profits made from the investment will be greater than the interest on the debt, then what makes it good versus bad?
Nearly 38% of global respondents to this week’s poll think the behavioral biases of investors are the primary cause of investment bubbles, while 33% of those polled believe responsibility lies with central banks and their easy money policies. Excessive leverage (19%) and government policies (7%) were less favored responses.
Having recently passed the four-year anniversary of the Lehman Brothers collapse, it’s tempting to believe that our economy and capital markets have learned from their mistakes. Nevertheless, every now and then Wall Street reminds us that it has “fallen off the wagon,” and reverted back to scary old ways of the bad old days. One of those old tricks is to add unnecessary leverage to assets that may not be safe to begin with.
When the Basel III rules become operative in January, banks will have to meet a new leverage standard that will cap the leverage permitted under other Basel rules. In a poll conducted earlier this week, we asked readers at what level the Basel Committee on Banking supervision should set its minimum leverage ratio.
Finance professor Amir Sufi of the University of Chicago Booth School of Business argues that the severe U.S. recession and Europe's ongoing economic woes can best be explained as aggregate demand and leverage problems that cannot be effectively treated through monetary policy initiatives alone.