Leverage is a tool that we often use in finance and is important to take into account when constructing any trading model. The ability to take on debt to lever up returns is useful, though it comes with its own set of risks. Specifically, leverage roughly preserves the Sharpe ratio of a strategy, so it can be a way of transforming low absolute returns into higher absolute returns with the same risk ratio. In this lecture we cover the basics of what leverage means as well as provide an introduction to risk-adjusted returns.
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