What financial concept indicates taking on debt to amplify returns?

The concept of financial leverage refers to the use of debt to increase the potential return on investment. When an investor utilizes leverage, they borrow funds to invest more capital than they currently possess. This strategy aims to enhance the gains from an investment, as the returns on the borrowed funds can compound on the original investment.

For instance, if an investor uses leverage to buy an asset that appreciates significantly, the returns on equity (the investor's own funds) are magnified, which can lead to higher profits compared to investing without borrowing. However, it’s essential to remember that while leverage can amplify gains, it can also increase risk since losses may also be magnified if the investment does not perform well.

In contrast, asset allocation focuses on how an investor distributes their investments among various asset categories to balance risk and return, while market volatility describes the extent of price fluctuations in the market, indicating risk rather than a strategy to enhance returns. Capital preservation aims to protect an investment against loss, typically using lower-risk investments rather than amplifying returns through debt.