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Answer :
The factor by which Advance's losses or profits will be multiplied is 10, representing the leverage gained by borrowing an additional $3,600 with his $400 of own money to invest. This amplifies potential gains or losses, making it a higher-risk investment strategy.
To determine the factor by which Advance's losses or profits will be multiplied, we need to find the leverage provided by the additional borrowed funds. Leverage is the use of borrowed money to increase the potential return of an investment.
Given that Advance borrows an additional $3,600 and has $400 of his own money to invest:
Total Investment = Advance's Own Money + Borrowed Funds
Total Investment = $400 + $3,600
Total Investment = $4,000
Now, let's calculate the leverage:
Leverage = Total Investment / Advance's Own Money
Leverage = $4,000 / $400
Leverage = 10
The leverage factor is 10. This means that Advance's profits or losses will be multiplied by a factor of 10 due to the borrowed funds. If the investment performs well, the returns will be amplified by 10. However, if the investment performs poorly, the losses will also be magnified by the same factor, making it a higher-risk strategy.
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