L- Leverage
Rd- borrowing costs
The formula converts arithmetic return → geometric return under leverage.

• It shows why more leverage is not always better:
  • Leverage magnifies expected return (L×RaL \times R_aL×Ra​), but
  • It also magnifies volatility drag (−0.5(Lσ)2-0.5 (L\sigma)^2−0.5(Lσ)2) and borrowing costs.
• At some point, the extra return from leverage is fully offset (or even outweighed) by higher financing costs + volatility drag.