CAPM & Country Risk Premium

Water Cooler Investing
#1

Hello AF community!

I need help figuring something out and a refresher of some sorts. Any help will be much appreciated.

I am trying to determine cost of equity for a security in India from a foreign investors point of view (say USA). To do so, I am adopting the CAPM methodology using India’s risk free, beta of indian security and ERP of the Indian market, instead of building up from US risk-free and US ERP and adding country risk premium to it.

I would assume that if the foreign investor can hedge currency risk, then using the CAPM methodolgy with Indian data should include the country risk (i.e Indian risk free rate and ERP should sufficiently account for coutry risk) and therefore I do not need to add any premiums to it. Am I right to make this assumption. If so, are there any publications that support this.

Thanks!!!

#2

That seems reasonable to me.

I don’t follow the literature on this, so I don’t know where you’d find it published.

#3

Thanks S2000 for confirming my thoughts! Still looking around for publications that mention this as I need to cite it for a report. Thanks though!

#4

I’d look in Damodaran’s Investment Valutaion book. I’m pretty sure he mentions it somewhere in the book.

If you can’t get access to the book, I’ll try to look it up in mine some time.

#5

I agree with MrSmart. I recall from one of his presentations an example on valuing Embraer (Brazilian airline company) from the perspective of an American investor.

#6

Thanks guys!

I did look into one of Damodaran’s presentation as well. It didn’t go into much detail though. However, I think I found a good source. the book is called “The Real Cost of Capital a busines field guide to better financial decisions” by Ogier, Rugman and Spicer.