Leverage Ratio, is it Debt/Equity or Assets/Equity?

[Steve Jobs]

Hi,

According to a practice question, it is Assets / Equity but according to investopedia, it is Debt / Equity.
http://www.investopedia.com/terms/l/leverageratio.asp

I'm confused, which one should I consider in the exam?

 

[David Harper CFA FRM]

You will indeed find leverage ratio variously defined but, in my opinion (and I think how we've consistently used it in our questions), the preferred default is assets/equity. Reasons:

1. It's most consistent with Basel's leverage ratio (the FRM has a heavy anchor in Basel), although note (a) the Basel ratio leverage ratio is exposure/capital (i.e., the regulatory analog of A/E) and (b) it is often inverted into E/A as in 3.0% leverage ratio with no particular preference between 33.33 A/E or 3% E/A
2. It is Malz primary definition, L = A/E
3. (It's also the CFA's definition, to which it doesn't hurt to match!). Thanks,

 

[Steve Jobs]

Thanks a lot David,