What does leverage refer to in the context of investment?

Leverage in the context of investment refers specifically to the ability to use borrowed funds to increase the potential return on investment. This strategy involves borrowing capital to invest in assets, amplifying both potential gains and risks. When an investor uses leverage, they can invest more than they could with just their own capital, which can lead to higher returns if the investment performs well. However, it's important to understand that while leverage can enhance returns, it can also magnify losses if the investment does not perform as expected.

The other options provided do not accurately define leverage. The amount of an investment that is in cash does not relate to leverage, nor does it characterize the ability to amplify returns with borrowed funds. The total assets owned by an investor relates to their net worth or portfolio size, but again, it does not speak to the specific mechanism of leverage. Lastly, the interest rate applied to borrowed funds is a factor in the cost of using leverage but does not define what leverage itself is. Understanding leverage is essential for investors as it plays a significant role in risk management and investment strategy.