The more an asset has payoffs that are positively correlated with future consumption, the more we should be compensated for this risk and so the more its returns should be higher.
My question precisely is, how would an asset’s payoffs NOT vary positively with your consumption? Presumably, an asset’s price is lowered (so higher return) if its payoff covaries positively with consumption. But isnt it completely normal that the more payoffs an asset gives you, the more you consume?
Also, if I do increase my consumption along with the asset’s payoffs, what does this have to do inherently with the asset? It could just be that I consume frivolously, but why would the asset considered itself be considered risky because of my consumption behavior?… It just really doesn’t make sense to me
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> positively correlated with future consumption
You answered your own question.
Future consumption means risk, there are risks with the product NOT being consumed.
Furthermore, some asset requires maintenance to keep in stock.
Your entire non-risk argument stems from the idea that the asset WILL be consumed 100% with no accidents. What happens if the machine breaks? what happens if the asset is damaged during storage? these are unforeseeable events, which makes them a risk.
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