Which of the following best describes negative leverage?

Negative leverage occurs when the cost of borrowing exceeds the return generated by the investment. In this context, using borrowed funds can lead to lower overall returns on equity because the interest costs associated with the debt diminish the income generated by the investment.

When an investment generates a return less than the interest rate on the borrowed funds, it results in a situation where the more one borrows, the less effective the capital becomes in generating profit for equity holders. This directly contrasts with the concept of positive leverage where debt would enhance returns.

While other options touch on different aspects of investing and finance, they do not accurately describe the scenario in which debt diminishes returns specifically. Understanding negative leverage is essential because it underscores the risks involved in leveraging debt in investments, particularly if the market or asset performance does not meet expectations.