Answer: 2.50

## Explanation The leverage ratio is calculated as: **Leverage Ratio = 1 / Initial Margin Requirement** Given: - Initial margin requirement = 40% = 0.40 **Calculation:** Leverage Ratio = 1 / 0.40 = 2.50 **Why this is correct:** 1. When purchasing on margin, the initial margin requirement represents the percentage of the total investment that must be funded with the investor's own capital. 2. With a 40% margin requirement, the investor contributes 40% and borrows 60%. 3. The leverage ratio measures how much total investment can be controlled per unit of equity. 4. For every $1 of equity, the investor can control $2.50 worth of securities ($1/0.40 = $2.50). **Alternative calculation:** - Total investment = 100% - Equity contribution = 40% - Leverage = Total investment / Equity = 100% / 40% = 2.5 **Verification of other options:** - Option A (1.50): This would correspond to a margin requirement of 66.67% (1/1.50) - Option B (1.67): This would correspond to a margin requirement of 60% (1/1.67) Therefore, with a 40% initial margin requirement, the maximum leverage ratio is 2.50.

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