Can someone please explain me example 8 from reading 46 and q. 17 of the EOC from the same reading? I keep getting them wrong.
Example 8 of reading 46 . An asset risk premium is high when there is a negative relationship between the future payoff and the investors marginal utility from future consumption.
First of all the problems, I did related to this concept are all wrong and I guess because I am not sure how to tackle it and im so sure its much simpler than this.
Here is the thing that I know: we demand high risk premium when we are uncertain about the economy and we save more now to consume more in the future which means we have high marginal utility from future consumption. However, I dont understand the first part. 1. What is the negative relationship about? 2. Future payoff of what? Like what we expect our future income to be? The answer talks about covariance between the payoff and the expected marginal utility from consumption
Question 17. Why is the answer B and not C?
I really cant grasp this whole idea of connecting the risk aversion, intertemporal rate of substitution and the payoff of an asset