The more an asset has payoffs that are positively correlated with future consumption (and so negatively correlated with SDF or marginal utility of tomorrows consumption), the more its returns should be higher.
Im not sure I get the intuition. Why would I have to be compensated if an asset’s payoffs vary with my consumption? Isnt it normal if the payoffs i get from the asset covary with my consumption, why would this be considered a risky thing..?
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The lowest risk investment is the one that depends on the least number of variables. You don’t really know what your consumption is going to be in the future. You may have an idea, but there are loads of things that could come up and throw off your estimates. To make the investment worth it, it needs to account for or “price in” the risk it contains; this can be done by making the investment cheaper upfront or by making the returns higher.
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