What are the primary risks associated with leverage?

The primary risks associated with leverage include magnified losses, higher risks, and the potential for forced liquidations, making the selected answer most relevant. When an investor uses leverage, they are essentially borrowing funds to increase their investment base, which amplifies both potential gains and losses. If the investment does not perform as expected, losses can exceed the initial capital invested due to this magnification effect.

Higher risks arise from the obligation to repay borrowed funds regardless of investment performance. If the value of the investment declines significantly, the investor can face not only a decrease in their equity but also the challenge of meeting debt obligations, leading to increased financial strain. In severe cases, the lender may require a forced liquidation of assets to recover the outstanding debt, further exacerbating the financial consequences for the investor.

Options suggesting reduced flexibility and lower returns or mentioning market volatility and interest rate increases also touch on relevant topics, but they do not encapsulate the core essence of the specific risks tied to leverage. While these factors can interplay with leveraged positions, they do not directly address the fundamental dangers posed by leveraging itself, such as the magnification of losses and the potential for forced liquidations.