LOS 39© discusses adjusting for emerging market risks through adjusting cash flows in scenario analysis. It suggests (or rather, “modern finance theory” suggests) that the risk of expropriation can be “diversified away”, and thus should not be included in the cost of capital. How exactly does one diversify the risk of expropriation? The only solution I could come up with is, “don’t own equity that Hugo Chavez is interested in.” Thoughts, suggestions? I’m not hung up on this, it just struck me as odd.
Sounds good enough for me, thanks!