Reasonable leverage

Reasonable leverage is defined as a leverage with positive leverage return. In view of the budget system, this paper proposes the Risk-Return (R-R) framework as the core of the reasonable leverage, explores the R-R based leverage framework, and proves that the Leverage Line (LL) is the leverage version of the Security Market Line (SML). The slope of the LL is the leverage Sharpe ratio measuring LRT (Leverage Return & Tax shields) per leverage risk. Financial risk, like the risk of earthquakes, has two dimensions: magnitude and depth, respectively measured by the variance of LRT and the liability ratio. Accounting rates of return are revised in the calculation of leverage return. In system view, incorporating the variables of the budget system into the R-R based model for reasonable leverage is the first extension. This paper documents international evidence about the R-R based reasonable leverage system.