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An investment firm uses a significant amount of borrowed capital to purchase a large portfolio of assets. A financial analyst comments that this strategy is inherently superior because it multiplies the gains from any increase in the portfolio's value. Which of the following statements provides the most critical and accurate evaluation of the analyst's comment?
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A highly leveraged investment firm puts up $20 million of its own capital and borrows an additional $180 million to make a total investment of $200 million in a portfolio of assets. If the value of this asset portfolio subsequently falls by 10%, what is the percentage return on the firm's own capital?
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An investment firm uses a significant amount of borrowed capital to purchase a large portfolio of assets. A financial analyst comments that this strategy is inherently superior because it multiplies the gains from any increase in the portfolio's value. Which of the following statements provides the most critical and accurate evaluation of the analyst's comment?
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