This has repeatedly bothered me something, referring, only, country

evolsteevol

Eh - I feel as if the formula should be presented differently with an extra set of parenthesis:

RFR + B[ { E(Rmkt) - RFR } + CRP]

EastCoastJ

When referring to the country risk premium, Schweser constantly says that the CRP is ADDED to the market risk premium. The formula is as follows:

RFR + B[E(Rmkt) - RFR + CRP]

Since you are adding the CRP to the RFR which is being SUBSTRACTED from the R(mkt) which composes the market risk premium, why do they keep saying you are ADDING it?

The only thing you are ADDING it to is the RFR. The market risk premium is reduced as a result of the CRP.

Or am I just missing something?

Cheers

ramdabom

Not sure if I get your query exactly, but I think you are just looking at this the wrong way. Mkt Risk Premium is E(Rmkt) - RFR. The CRP is then added to the result of that to compensate for additional sovereign risk. Don't think it's just added to the RFR, it's added to the result of E(Rmtk) - RFR, i.e. the Market Risk Premium.

rkapoor

The extra pair of paranthesis you are putting will generate the same result as the first formula you typed in the begining of this thread.

Conceptually...CRP is just an extra premium you are adding to the market. Remember this, CRP is the amount of extra return you are adding to the market return and then do all the generic stuff of subtracting Rf, multiplying B etc.

ftwcfa

Adding to the premium is right, you are not adding it to the RFR.

Expected return of market - RFR = risk premium

= (E(R) - RFR)

and you add CRP to it

= E(R) - RFR + CRP

You might be thinking about E(R) - (RFR+CRP), which is incorrect