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Globalization has caused more correlation in world markets. Does that mean risk has increased? Or does higher correlation in international economies reduce risk?
We address this question today: “Has globalization over the last three decades enhanced risk and therefore the discount rates?”
Risk is a given in any investment. It is incorporated into valuation in the cost of equity and debt which flows into the discount rate. A risk premium is added on international projects. This page looks at why this may NOT be a good idea.
We address this question here today: “What is the argument for NOT using a country risk premium?”
Risk is a given in any investment. It is incorporated into valuation in the cost of equity and debt which flows into the discount rate. A risk premium is added on international projects. This page looks at why this is so.
This page answers the question: “When do you use a country risk premium? What is the argument for using a country risk premium?”
Estimating a market risk premium is challenging due to many reasons. None can predict the future! So we default to historical market risk premiums. Even when we agree that we can look to the past to arrive at an estimate of the market risk premium, there is significant disagreement on the time frame to be used. There is disagreement on the frequency to be used: daily, weekly? There is also disagreement on the method to be used: geometric average or arithmetic average as well as the market to be considered: US or London market or another one? Given these issues with market risk premium, do we have an alternative?
We address this question here: “Given the issues in estimating a market risk premium, can you suggest an alternative metric or method to arrive at risk premiums?”