I am confused in Reading 55, Portfolio Management, Economics and Investment Markets, section 3
Equation(4)
l(t,1) = [1 - P(t,1)]/P(t,1)
=
1
– - 1
E(m)
Statement #1 : Equation 4 implies that the one-period real risk-free rate is inversely related to the inter-temporal rate of substitution. That is, the higher the return the investor can earn, the more important current consumption becomes relative to future consumption
In section 3.1 of CFAI book they says
Statement #2 : “If the return increases, the investor substitutes away from current consumption to future consumption by purchasing an asset”
Are they trying to say in statement#1 that if future rate of return is higher then investor will have higher marginal utility from current consumption? If yes then isn’t counter-intutive to statement #2 because as per statement#2 a investor will only prefer future consumption if future interest rate is higher. So if investor see higher rate of return in future he/she will invest more i.e. he/she see more utility in future consumption’