I’ve been struggling on the topic about covariance between ITRS and expected future price of risky asset.
In the textbook, it says Cov(m1, P1) = risk premium
For risk-adverse investors, the Cov(m1, P1) should be negative, so I thought risk premium shall also be negative.
But then I read text from somewhere else saying
• Covariance between ITRS and expected future price of a risky asset is negative, resulting in a positive risk premium.
• The larger the negative covariance, the higher the risk premium.
Why is the covariance is negative can result in a positive risk premium?
So confused on this one!
Thanks for help in advance.