Question from Portfolio Concepts LOS 64

The last LOS contains the concept that: In recessions, an investor who is dependent on salary from income, avoids cyclical stocks (causing decreasing prices, higher risk premiums) and purchases counter-cyclical stocks (bidding prices, lower risk premiums). Whereas, an independent wealthy investor faces no systematic risk due to recessions and purchases cyclical stocks with high risk premiums as his salary is not dependent on income (or for that matter GDP fluctuations). The questions it that is this concept related to behavioral financial decisions which is common among such investors? Secondly, when stock prices go down for cyclical stocks, why do risk premiums go higher? Is it because an upside potential exists and expected return is higher for future when GDP growth revives?

look at the question this way: stock prices go lower… which means required return goes higher. given rf is the same, beta remains the same - only thing that could have happened is risk premium went higher.

I don’t think this relates to behavioral finance. Basically, an investor who’s salary is dependent on income needs more downside protection. Also, when stock prices go down, required return goes up, which means risk premia increase also.