What does leverage refer to in investment terms?

Leverage in investment terms specifically refers to the use of borrowed funds to increase potential returns on an investment. When an investor uses leverage, they are essentially amplifying their investment capacity by taking on debt. This means they can invest more money than they currently possess, aiming for a proportionally higher return on their investments if those investments perform well.

Using leverage can yield significant gains when the market conditions are favorable, as the returns are applied to a larger amount of investment capital. However, it is crucial to acknowledge that leveraging can also increase the risk substantially; if the investments do not perform as expected, losses are similarly magnified because the investor is still responsible for repaying the borrowed money.

The other options do not align with the definition of leverage. Personal savings refer to capital that is already owned, accumulation of assets refers to the growth of holdings over time without necessarily implying the use of debt, and diversification pertains to spreading investments across different assets to mitigate risk, which is a separate concept from leveraging.