Which of the following is a risk associated with investing in warrants?

Investing in warrants involves a unique set of risks, particularly associated with the inherent structure of leverage involved. When a warrant is exercised, it typically allows an investor to purchase shares at a predetermined price. This leverage can amplify the potential returns if the underlying asset performs well. However, it also magnifies the potential losses if the asset’s price does not increase or declines.

The greater downside potential due to gearing is particularly important to understand. Because warrants often require a lower initial investment compared to purchasing shares outright, they can lead to a disproportionate impact on an investor's capital if the investment does not perform as expected. This risk is compounded by the fact that warrants can expire worthless if the underlying asset does not reach the exercise price before the expiration date, leading to a total loss of the investment in the warrant itself.

In contrast, options such as increased liquidity of shares, price stabilization of the underlying asset, and guaranteed returns do not align with the fundamental nature of warrants. For instance, while increased liquidity may be seen in the shares themselves, it does not directly pertain to the risk profile of warrants. Price stabilization and guaranteed returns are attributes that would generally not be associated with the unpredictable nature of such investments. Understanding the leverage aspect helps investors