Explanation

The leverage ratio is defined as the ratio of the total value of the position to the equity investment supporting it. Initially, the leverage ratio is calculated as:

• Initial leverage ratio: Total value / Equity = 1 / 0.5 = 2.

After a 25% decline in the security's price:

• New market value: 1 - 0.25 = 0.75 (75% of the original value).
• Impact on equity: The equity reduces by twice the percentage decline due to the initial leverage (2 * 25% = 50%). Therefore, the remaining equity is 50% - 50% = 25% of the original value.
• Updated leverage ratio: New market value / New equity = 0.75 / 0.25 = 3.

Option B (3) is correct because it reflects the updated leverage ratio after the price decline. Option A (2) represents the initial leverage ratio, and Option C (4) incorrectly uses the decline percentage as the denominator for the leverage calculation.