From the course: Cert Prep: CFA Exam Level 1
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Leverage and risk management on the CFA
From the course: Cert Prep: CFA Exam Level 1
Leverage and risk management on the CFA
- [Instructor] Risk-management isn't just about protecting against losses, it's also about understanding where risks come from. In this video, we'll define and classify the types of business risk and walk through the leverage concepts that amplify those risks. These topics are core to CFA-level corporate finance and capital structure analysis. So, what is leverage? Well, leverage refers to the use of fixed assets, either in operations or financing, to amplify outcomes. In other words, we use fixed costs to magnify our returns. When revenues go up, leverage magnifies profits. But when revenues go down, leverage amplifies losses. There are two main types of leverage: operating leverage and financial leverage. Next, let's talk about business risk. Business risk is the uncertainty surrounding a company's operating performance. It exists whether or not a company uses debt. Factors that affect business risk include…
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