[stinkypete]

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if you have a portfolio that returns 15% at 45% volatility with no leverage, you are equally likely to be "wiped out" if the exact same investor has a 5% return portfolio with 15% volatility leveraged 3:1. (i picked 5% return here to make the resulting portfolio identical save transaction/leverage costs)

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that's only true if you stay leveraged exactly 3 to 1, which would mean continuously buying or selling whatever youre invested in. but adjusting your positions continuously is not possible, and even if you do adjust on a regular basis, your costs will be much higher.

if you're leveraged 3 to 1 and your portfolio drops 20%, you now only "own" 13.33% of your portfolio and youre suddenly leveraged 6 to 1. if it drops 33% before you make adjustments, you've gone broke. you'd likely make adjustments before that happens, but this illustrates why it's not the same. if you're leveraged 1 to 1 and the same 33% drop occurs, you've only lost 33%.

modeling returns with an expected value (average return) and a standard deviation (volatility) really doesn't work with lots of leverage. it's too far from a normal distribution.

and yes, i was hung over this morning.