CFA Level I · CFA Level I Exam · Introduction to Geopolitics
A country's government announces new sanctions that restrict a key export sector. For an investor holding the equities of firms in that sector, the geopolitical risk is most likely to affect returns through:
Returns are most likely hurt by a higher risk premium combined with lower expected cash flows. Sanctions limit export revenues, and the added uncertainty raises the return investors require, so both the numerator and the discount rate in valuation move against the holders.
- Aa higher risk premium and lower expected cash flowsCorrect
- Blower expected inflation and a higher risk-free rate
- Ca lower risk premium and higher expected cash flows
Explanation
Sanctions restricting exports reduce expected revenues and cash flows for the affected firms, and the greater uncertainty raises the required risk premium. Both effects lower valuations. The other options describe opposite or unrelated effects.
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