Can I get some intuition on this sentence: “investors without labor income will accept more cyclical risk to capture a premium for a risk that they do not care about.” Thx!
if you are a construction worker…you do not want to own cyclical stock because if the economy tanks…your stock portfolio tanks and you most likely lost your job. if you are a rich trust fund baby you do not rely on a income…thus you do not care about cyclical stocks and can buy them and earn a premium
Thanks, BCH. I guess you are not a bluecollar construction guy, but very familiar with that industry! 
I am also confused by the sentence regarding priced recession risk in the curriculum: Investors can thus, earn a substantial premium for holding dimensions of risk unrelatd to market movements. 
construction worker and a stock portfolio!!! yeah right!
lzhao Wrote: ------------------------------------------------------- > Thanks, BCH. I guess you are not a bluecollar > construction guy, but very familiar with that > industry! > > I am also confused by the sentence regarding > priced recession risk in the curriculum: > Investors can thus, earn a substantial premium for > holding dimensions of risk unrelatd to market > movements. > > Is there a sentence before this? From what I can gather, I think it means that investors are not compensated for holding specific risk becasue diversification is cheap…however, certain investors, I will go back to my trust fund baby example…can hold portfolio of securities that are not diversified and bear specific issuer (stock) risk that is not related to market movements… for example you can hold distressed securities and take play the odds if the company will file bankruptcy or not…
the previous sentences are: if the average investor holdng a job bids up the price of the countercyclical stocks, then recession risk will be priced. In addition, procyclical stocks would have lower prices than if the recession factor were not priced. Investor can thus… I still do not understand the logic…
lzhao Wrote: ------------------------------------------------------- > the previous sentences are: > if the average investor holdng a job bids up the > price of the countercyclical stocks, then > recession risk will be priced. In addition, > procyclical stocks would have lower prices than if > the recession factor were not priced. Investor can > thus… > > I still do not understand the logic… if some risk is priced in a stock it means investors have already taken into account the probability of that risk occuring and have either driven the price of the stock up or down. if you are a construction worker and you do not want any cyclical stocks…you buy a lots of countercyclical stock and bid the price of countercyclical stocks up…if stock price goes up then returns go down…this means the recession risk is priced into the stock… as ordinary investors move into countercyclical stock and away from cyclical stocks…the price of cyclical stocks go down and expected returns go up (recession risk priced in)…and the trust fund baby buys the cyclical stock and holds during recession and when the economy turns better (during recovery) and everyone wants cyclical stock he can sell them for a large return
I understand better now. BTW, why specifically mention “risks unrelated to market movements”?