1. What is Leveraged Return?

Leveraged return refers to the potential return on investment when using borrowed funds to amplify the investment position. It measures the profit or loss generated from an investment relative to the amount of equity invested, taking into account the cost of borrowing.

2. How Does the Calculator Work?

The calculator uses the leveraged return formula:

Where:

• \( \text{Initial Investment Return} \) — Return on the initial capital invested (£)
• \( \text{Leverage} \) — Leverage multiplier (decimal)
• \( \text{Finance Costs} \) — Cost of borrowing funds (£)

Explanation: The formula calculates the net return after accounting for both the amplified gains/losses from leverage and the associated borrowing costs.

3. Importance of Leveraged Return Calculation

Details: Calculating leveraged return is crucial for investors using margin or borrowed funds to understand the true profitability of their investments after accounting for financing costs and risk exposure.

4. Using the Calculator

Tips: Enter the initial investment return in pounds, leverage as a decimal (e.g., 2.0 for 2x leverage), and finance costs in pounds. All values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good leveraged return?
A: A good leveraged return exceeds both the cost of borrowing and the return that could be achieved without leverage, while accounting for the additional risk.

Q2: How does leverage affect investment risk?
A: Leverage amplifies both potential gains and losses, increasing the overall risk profile of the investment.

Q3: What are common sources of finance costs?
A: Finance costs typically include interest on margin loans, brokerage fees, and other borrowing-related expenses.

Q4: When should investors use leverage?
A: Leverage should be used cautiously by experienced investors who understand the risks, typically in markets with strong conviction and favorable borrowing conditions.

Q5: Are there regulatory limits on leverage in the UK?
A: Yes, the FCA imposes leverage limits on retail investors trading CFDs and other leveraged products to protect consumers from excessive risk.