What type of risk does leveraging investments relate to?

Leveraging investments primarily relates to liquidity risk because when investors use borrowed funds to amplify their potential returns, they simultaneously increase their financial commitments. If market conditions change or if the value of the assets declines, these investors may find themselves unable to meet their financial obligations. This situation can lead to a liquidity crunch, where they cannot quickly sell assets without significantly affecting their market price, or they lack access to additional funds to cover margin calls or debt servicing requirements.

Using leverage increases exposure to market fluctuations, so a change in asset prices can directly impact liquidity. If an investor needs to liquidate leveraged positions in a declining market, the risk amplifies, leading to potential losses that could jeopardize cash flow and overall financial stability. Thus, understanding liquidity risk is crucial for any investor who engages in leveraging as part of their investment strategy.