Portfolio volatility is the only source of risk in mean-variance optimality, but it fails to capture all the risks faced by leveraged portfolios. These risks include the possibility of margin calls and forced liquidations at adverse prices and losses beyond the capital invested. To recognize...

This paper proposes that leverage aversion be introduced into portfolio theory, and that leverage aversion be considered along with volatility aversion in determining optimal portfolios. Mean-variance-leverage optimization results in a three-dimensional mean-variance-leverage efficient surface,...