Wealth and Risk from Leveraged Stock Portfolios
DOI:
https://doi.org/10.61190/fsr.v11i1.4720Keywords:
Value at Risk, Leverage, Asset allocationAbstract
A modest amount of leverage enhances the performance of stock portfolios in the long run. However, higher amounts of leverage produce dramatic declines in long-run wealth. Using probability distributions constructed from value-weighted stock index returns and a borrowing rate two percent- age points higher than Treasury bills, the maximum median ending wealth is achieved with an asset allocation of 170% stock. We use Value at Risk (VaR) to measure downside risk over a range of asset allocations and holding periods.
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