Epsilon Archive for Student Projects

Abstract

Investors’ use borrowing as a way to profit from leverage advantages in their portfolios.
When investors borrow with their securities as safety for the loan and the value of the
securities decrease the investor can get a portfolio with more credit than what is covered by
the value of the securities and risk huge losses. To what extent an investor is allowed to
borrow with his portfolio as safety depends on the bank or broker and varies between the
providers. By studying available material and in addition to that making an empirical study I
attempt to find out the reason for the varying degrees of leverage possibilities between the
brokers and how the degree of maximum borrowing on the securities are decided. The
findings show that decision of leverage degree on a security is made after first making a
quantitative analysis of the stocks volatility and liquidity and thereafter make a qualitative
analysis of the company. What I think should be of more focus is the portfolios combination
of securities and how diversification changes the portfolios risk.