A Leverage Example. Suppose you purchased an asset for $5,000. The asset is risky and can either increase in value to $5,400 or decrease in value to $4,800. Let us look at the effects of leverage on...

A Leverage Example. Suppose you purchased an asset for $5,000. The asset is risky and can either increase in value to $5,400 or decrease in value to $4,800. Let us look at the effects of leverage on your returns to this investment.

a. Suppose you did not borrow any money, but put in your own $5,000 to purchase the asset. What percent gain would you experience if the asset increased in value to $5,400? What percent loss would you experience if the asset value decreased to $4,800?

b. Now, suppose you borrowed $4,500 to purchase the asset. What is your percentage gain or loss on the investment now?