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FRM Part II · FRM Exam Part II · Country Risk: Determinants, Measures, and Implications

Using the data from a mature-market premium of 5.0% and a country risk premium of 4.5% for Country X, an analyst values a Country X company with a beta of 1.2 when the company's earnings come entirely from domestic operations. Assuming the beta approach (country risk premium added to the mature premium, then multiplied by beta), what is the equity risk premium applied to the company's cash flows?

The applied premium is 11.4%. Under the beta approach, the country risk premium is added to the mature-market premium (5.0% plus 4.5% equals 9.5%), and the sum is multiplied by the company's beta of 1.2, giving 11.4%.

  1. A5.4%
  2. B6.0%
  3. C9.5%
  4. D11.4%Correct

Explanation

Total premium = 5.0% + 4.5% = 9.5%. Multiplying by beta 1.2 gives 11.4%. The 9.5% option ignores beta, 6.0% scales only the mature premium, and 5.4% scales only the CRP.

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