Suppose investment A has a return of 100% in year one, and of −100% in year two. 

question 1. What is the return over the two years of investment A? Assume all returns are arithmetic returns. 

question 2. Suppose investment B has a return of 50%. How much leverage do you need for the return on equity of investment B to replicate the return on investment A? 

question 3. What is the return on equity on B using the leverage you found, assuming −100% return in year 1? 

4. What does this tell you about use of leverage in investment?