Chartered Alternative Investment Analyst Association (CAIA) Exam 2025 – 400 Free Practice Questions to Pass the Exam

Leverage refers to the practice of using borrowed capital to amplify potential returns on an investment. In alternative investments, leveraging allows an investor to invest more than they could with just their own cash, thereby increasing their exposure to potential gains (or losses). By using borrowed funds, the investor can enhance their investment capacity and potentially achieve higher returns than those attainable through their available equity alone.

When properly managed, leverage can be a powerful tool in enhancing investment performance. However, it also increases risk, as it can magnify both gains and losses. This characteristic makes understanding leverage crucial for investors in alternative assets, where the dynamic between risk and return can be especially pronounced.

The other options do not accurately describe leverage. Investing in cash reserves pertains to liquidity management rather than leveraging capital for investment purposes. A valuation method for real estate is unrelated to leverage, as it focuses on assessing the value of an asset rather than increasing investment capacity. Lastly, limiting the types of investments relates to investment strategy or policy rather than the concept of leverage itself.