facebookI have been hearing some comments on investments within emerging markets. Should I be introducing risk premiums for these stocks? - Seedly

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Anonymous

18 Apr 2019

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General Investing

I have been hearing some comments on investments within emerging markets. Should I be introducing risk premiums for these stocks?

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Isaac Chan

02 Apr 2019

Business at NUS

Based on what Aswatch Damodaran has mentioned, it seems that you shouldn't be introducing risk premiums. If the Capital Asset Pricing Model is your discount rate, then you should only be accounting for is non-diversifiable risk.

This probably stems from the notion that investors are only awarded for non-diversifiable risk, and not diversifiable ones. Hence, if stocks are correlated to global events, then there is non-diversifiable risk that is experienced by that country's stocks. This risk should then be accounted for.

You can probably measure this country risk premium comparing the differecnce in interest rates between a bond issued by the country and the riskless bonds of the country you are performing the valuation in. This is usually called the bond default spread, which can be added to the risk premium.

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