- CFA Exams
- CFA Level I Exam
- Study Session 10. Corporate Finance (1)
- Reading 33. Cost of Capital
- Subject 5. Country Risk
CFA Practice Question
Given the following information:
- Yield on 10-year government bond in Argentina: 9.5%.
- Yield on 10-year U.S. Treasury bond: 5.5%
- Annualized σ of Argentina's national stock index: 40%
- Annualized σ of the U.S. bond index: 10%
- Equity risk premium for a project in the U.S.: 10%
The equity risk premium for a similar project in Argentina is ______.
A. 16%
B. 26%
C. Not enough information is given.
Explanation: To calculate the equity risk premium, we need to know the annualized σ of Argentina's bond index.
User Contributed Comments 10
| User | Comment |
|---|---|
| zzhumanov | pls explain |
| sgspotts | take the nominal spread between the two bonds, in this case 4%, and multiply it by the ratio of the std deviation of argentina's stock index divided by the std deviation of argentina's bond index. The problem gives the sd of US bond index, so more info is needed. |
| JCopeland | Spread*(SD of Foreign Equity/SD of foreign debt)= equity risk premium. International Equity Risk Premium + Domestic Equity Risk Premium= New RP. Hope that helps. The book may call it something slightly different, but it's the same concept. |
| supersimps | You need STDEV of the FOREIGN bond index, not the U.S. bond index |
| Thecatz | tricky |
| zeen1 | hmm... mistook SD of Argentina stock index as bond index... need to concentrate and read carefully... |
| gill15 | I wasnt even looking at that. I was looking the at the govt yield in argentina --- it's not stated in the developed countries(US) currency....so I said not enough info |
| davcer | tricky, information for us is useless |
| heshamessa | you need to know the annulaized standard deviation of argentina gov bonds in terms of us currency |
| Michaelali | please explain |