FRM Part II · FRM Exam Part II · Country Risk: Determinants, Measures, and Implications
An analyst values a company operating in an emerging market and builds the cost of equity from a mature-market equity risk premium plus an additional premium for the country. Which statement best describes the purpose of this additional country risk premium (CRP)?
The country risk premium is an add-on to the mature-market equity risk premium that compensates equity investors for the additional default, political and economic risk of investing in a riskier country. It is not an inflation adjustment or a substitute for beta.
- AIt compensates equity investors for the extra risk of operating in a country with higher default and political risk than a mature marketCorrect
- BIt converts a nominal cash flow into a real cash flow for the country
- CIt replaces the beta of the company when the company is unlisted
- DIt equals the risk-free rate of the country minus the risk-free rate of the United States
Explanation
The total equity risk premium for a country equals the mature-market premium plus a CRP reflecting additional country-specific risk. It is not an inflation adjustment, a beta substitute, or a risk-free rate differential.
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
- Over several weeks, a euro-area sovereign's CDS spread rises sharply while the spreads on the country's banks' CDS also widen by a similar a…
- A risk analyst at an international bank reviews the sovereign credit ratings of several emerging economies. According to Damodaran's discuss…
- A risk analyst at a global bank reviews a emerging-market sovereign whose local-currency rating is two notches higher than its foreign-curre…
- A credit officer reviews a corporate borrower whose revenues are in local currency, but whose debt is dollar-denominated, in a country whose…
- Which of the following is typically a source of sovereign default risk that is NOT captured by the government's ability to pay but relates t…
- A portfolio manager estimates an equity country risk premium by scaling the sovereign default spread. A country is rated Ba1 with a default …