What does the formula for return on invested funds with leverage include?

The formula for return on invested funds with leverage includes borrowing costs and investment returns because leveraging enables an investor to amplify their potential returns through the use of borrowed capital. When an investor uses leverage, they are engaging in a financing strategy that increases their investment exposure by borrowing funds. This borrowed capital comes with associated costs, typically in the form of interest or borrowing fees, which need to be accounted for when calculating the net return on the investment.

The overall return on invested funds thus reflects both the returns generated from the investments and the costs incurred from borrowing. This relationship is key to understanding the dynamics of leveraged investing, as it illustrates how leverage can enhance gains but also introduces additional risks and expenses that can affect the net result.

In contrast, while the appreciation of equities and trading expenses may influence overall investment performance, they do not specifically capture the essence of the leverage formula, which focuses on the interaction between the return on investments and the costs of borrowing. Additionally, factors like market conditions may also play a role in the overall investment environment but are not a direct part of the mathematical formula that calculates returns specifically derived from leveraged funds.