Leverage Aversion, Efficient Frontiers, and the Efficient Region

We propose that portfolio theory and mean-variance optimization be augmented to incorporate investor aversion to leverage and suggest a specification for leverage aversion that captures the unique risks of leverage. We also introduce mean-variance-leverage efficient frontiers, compare them with conventional mean-variance efficient frontiers, and develop the mean-variance-leverage efficient region. Our analysis shows that leverage aversion can have a large impact on an investor's portfolio choice