1. What is Return on Leverage (ROL)?

Definition: ROL measures the percentage return on a leveraged investment, accounting for both the borrowed funds and the investor's own capital.

Purpose: It helps investors evaluate the effectiveness of using leverage in their investment strategy by showing the return relative to the total position size.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

• \( ROL \) — Return on leverage (percentage)
• \( Gain \) — Profit from investment (USD)
• \( Cost \) — Borrowing cost (USD)
• \( Initial\ Margin \) — Investor's own capital (USD)
• \( Leverage \) — Leverage ratio (e.g., 5 for 5:1 leverage)

Explanation: The formula calculates the net profit (gain minus costs) as a percentage of the total leveraged position size.

3. Importance of Return on Leverage

Details: Understanding ROL helps investors assess whether the potential returns justify the risks and costs of using leverage in their investments.

4. Using the Calculator

Tips: Enter the investment gain, borrowing costs, initial margin (your capital), and leverage ratio. All values must be > 0 except costs which can be 0.

5. Frequently Asked Questions (FAQ)

Q1: What's a good ROL percentage?
A: This depends on the asset class and risk tolerance, but generally higher than the cost of borrowing to be worthwhile.

Q2: How does leverage affect ROL?
A: Higher leverage magnifies both gains and losses, potentially increasing or decreasing ROL significantly.

Q3: Should I include all costs in the Cost field?
A: Yes, include all borrowing costs like interest payments, fees, and any other expenses associated with the leverage.

Q4: What's the difference between ROI and ROL?
A: ROI measures return on your actual invested capital, while ROL measures return on the total leveraged position.

Q5: Can ROL be negative?
A: Yes, if costs exceed gains or if the investment loses money, ROL will be negative.