TAILIEUCHUNG - A GUIDE FOR INVESTORS: Borrowing to invest

Even though actual stock returns do not verify Assumption 1, it is an acceptable first-cut approximation. This means that we abstract from lead-lag effects (Lo and MacKinlay, 1990), nonsynchronous trading (Shanken, 1987), and autoregressive conditional heteroskedasticity (Bollerslev, Engle and Woooldridge, 1988). Note that most of the current estimators for the covariance matrix of stock returns also use this assumption. Future research will be devoted to relaxing it. It is, however, not clear that by introducing extra degrees of freedom in the estimation process to account for dependence and conditional heteroskedasticity one will be able to improve out-of-sample performance | Borrowing to invest A GUIDE FOR INVESTORS Is it the right strategy for you OSC ONTARIO SECURITIES COMMISSION Contents Topping up your RRSP 2 Using your home to buy investments 2 The risks of borrowing against your home 3 Before you invest 4 Borrowing to buy mutual funds or other investments can be an effective way to boost your potential returns but it involves more risk than paying for an investment outright with cash. Investing with borrowed money is also known as leveraging . As long as your investment increases at a rate that is higher than your borrowing costs you can make money. However whether your investment makes money or not you still have to pay back the loan plus interest. If you rely solely on your investment returns to cover your borrowing costs and your investment falls in value you could end up defaulting on the loan. Ontario Securities Commission Borrowing to invest 1 Topping up your RRSP Many investors borrow so they can make a larger contribution to their RRSP and get a bigger tax refund. A common strategy is to use the tax refund to pay off or pay down the loan to reduce the amount of interest payable. If you don t pay the loan off as scheduled you could end up paying more in interest than what you get back in a tax refund. Using your home to buy investments People who have built up equity or paid off their mortgage may be tempted to unlock some of this value by borrowing against their home and investing the money in mutual funds or stocks. They may refinance their existing mortgage take out a new mortgage or get a line of credit secured by their home. The hope is that the investment will not only cover the loan and related borrowing costs but also generate extra income. The downside is that you could be putting your equity and possibly your home at risk. Ontario Securities Commission Borrowing to invest

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