Ace the AFP Exam 2026 – Boost Your Financial Wizardry!

The term "leverage" in finance specifically refers to the use of borrowed funds to increase the potential return on investment. When an investor or a company utilizes leverage, they borrow capital to expand their investment capacity. This strategy allows individuals or businesses to invest more than they would be able to with their own equity alone, effectively amplifying potential returns on their investments.

For instance, if a company takes out a loan to purchase additional machinery or expand operations, the aim is to generate more income than the cost of the loan. If successful, the returns generated from these investments can exceed the cost of servicing the debt, leading to higher overall profitability. However, it’s important to acknowledge that while leverage can magnify gains, it can also amplify losses, making it a double-edged sword.

The other options discuss different financial concepts and practices but do not correctly define leverage. Investing in high-risk assets describes a risk profile rather than borrowing practices. Calculating net worth is a straightforward assessment of assets versus liabilities, and selling assets to raise capital pertains to liquidity and capital management strategies, not leverage itself. Thus, the correct understanding of leverage focuses on the strategic use of debt to increase investment potential.