FRM Part I · FRM Exam Part I · Country Risk: Determinants, Measures, and Implications
A mature-market equity risk premium is 5.0%. Country X has a sovereign default spread of 3.0%. The annualized standard deviation of Country X's equity index is 24%, and that of its government bond is 15%. Using the relative-volatility approach, what is the total equity risk premium for Country X?
The total equity risk premium is 9.8%. The country risk premium is the 3.0% default spread times the volatility ratio of 24/15, or 1.6, giving 4.8%, which is added to the 5.0% mature-market premium.
- A8.0%
- B9.8%Correct
- C7.8%
- D10.0%
Explanation
CRP = 3.0% × (24/15) = 3.0% × 1.6 = 4.8%. Total ERP = 5.0% + 4.8% = 9.8%. The 8.0% option omits the volatility scaling, using the raw spread.
Did you get it right without looking?
One question tells you little. A timed set on Country Risk: Determinants, Measures, and Implications shows your real accuracy, how long you take and where you lose marks.
More Country Risk: Determinants, Measures, and Implications questions
- A valuation uses local-currency cash flows for a company in a country with expected inflation of 8% while US expected inflation is 2%. The U…
- Which statement about sovereign credit ratings from agencies such as Moody's and S&P is most accurate?
- Which of the following is the most accurate description of how a country's dependence on a single commodity affects its risk profile?
- A country's USD-denominated sovereign bond has a default spread of 3.0%. The annualized standard deviation of its equity market is 24% and t…
- A sovereign's one-year dollar bond yields 9.0% and the risk-free rate is 4.0%. Investors expect a recovery of 40% of the promised payoff in …
- A 5-year sovereign CDS on Country W has a spread of 360 bps. Assume a recovery rate of 40% and a constant annual hazard rate, using the appr…