What investment strategy involves using borrowed funds to potentially increase returns?

The selected answer focuses on the concept of leverage, which in the context of investments refers to the practice of using borrowed money to amplify potential returns on an investment. By employing leverage, an investor can use a smaller amount of their own capital while gaining access to a larger investment base. This can lead to higher profits if the investment performs well, as the investor's gains are calculated on the total investment amount, including borrowed funds.

For instance, if someone wants to buy a property worth $500,000 but only has $100,000 of their own money, they can borrow the remaining $400,000. If the property appreciates in value and is sold at a higher price, the profit realized would be significantly larger due to the initial investment leveraging the borrowed funds. However, it is important to understand that while leverage can increase returns, it can also magnify losses if the investment does not perform as expected, highlighting the risks associated with this strategy.

In comparison, hedging involves reducing risk through various strategies, pooling relates to gathering funds from multiple investors, and amortization refers to the gradual repayment of a loan over time, none of which specifically highlight the strategy of borrowing funds to enhance returns.