General Securities Representative (Series 7) Practice Exam – Your All-in-One Guide to Exam Success!

Financial leverage refers to the strategy of using borrowed funds to increase the potential return on investment. By borrowing money, an investor can invest more than what they could by using their own capital alone. This practice magnifies the potential gains because any profits generated from the investment are based on a larger amount of capital. In the scenario where investments perform well, the returns can significantly exceed those that would have been achieved using just personal funds. However, it is important to note that while financial leverage increases potential returns, it also increases risk, as losses can be magnified just as much when investments do not perform as expected.

The other options focus on different aspects of investing and risk management. The second choice addresses diversification, which is a strategy to reduce risk rather than leverage. The third option involves investing excess cash in low-risk assets, which does not involve borrowing and thus does not illustrate leverage. The fourth option mentions using only personal savings for investment, which would not constitute leverage since it does not involve using borrowed funds. By contrast, the chosen answer accurately represents the definition and implication of financial leverage in investment strategies.