Comparative Advantage of investor

[ishwar_jindal]

There is a practice question #7 in reading 53 in CFAI book 2016. The question is
[question removed by moderator]
After some thought what I have understood from this answer is that a investor who is not affected by recession related situations has advantage of investing in recession-sensitive securities because recession-sensitive would have extra risk premium (and thus higher return) compared to recession-insensitive securities. Since the money/income which such a investor is going to invest is not affected by recession so such a investor will able to invest more consistently and get return compared to a salaried person whose investment will not be consistent because his/her income will be impacted by recession.
Is this understanding correct or anyone would like to add anything?

 

[Harrogath]

Your rational is correct. I would only add the investment horizon factor. A wealthy investor, in order to bear cyclical risk (and receive the extra risk premium return you described) on a security, need to have an investment horizon longer than the cycle itself, if not, he will have a capital depreciation.

 

[ishwar_jindal]

Thanks Harrogath for the additional input.