- CFA Exams
- CFA Exam: Level I 2021
- Study Session 10. Corporate Finance (1)
- Reading 33. Cost of Capital
- Subject 5. Country Risk
CFA Practice Question
To calculate the country equity premium, the following inputs are needed:
II. Annualized σ of equity index
III. Annualized σ of the sovereign bond market in terms of the local currency
IV. Annualized σ of the sovereign bond market in terms of the developed market currency
V. Annualized σ of the equity index in terms of the developed market currency
I. Sovereign yield spread
II. Annualized σ of equity index
III. Annualized σ of the sovereign bond market in terms of the local currency
IV. Annualized σ of the sovereign bond market in terms of the developed market currency
V. Annualized σ of the equity index in terms of the developed market currency
Correct Answer: I, II and IV
The logic is that the sovereign yield spread captures the general risk of the country, which is then adjusted for the volatility of the stock market relative to the bond market.
User Contributed Comments 4
| User | Comment |
|---|---|
| omf24 | Why is it II and not V? |
| prajacti | because you plan to invest in the country using it's local currency. |
| syazwan21 | ^ didn't think of it that way. Thanks prajacti! |
| jagp | and why don't you compare apples with apples (equity index of the contry with bond market of the country - developing country's currency) |