In the last paragraph on page 272 of Book 3 (corp fin & port mgmt) schweser notes - it is given “unlike the risk premium on market portfolio , which is always positive, the risk premium on any given currency can be positive or negative and is likely to be unstable over time…” As far as I know, if the returns from the market (benchmark) are negative, then the Risk Premium is negative ( Benchmark returns - Risk free rate). Is the above statement “always positive” in schweser right ?
I think it is an assumption that is required to make CAPM valid. If the MRP was negative, then the CAPM would predict that more risk (higher Beta) would result in a lower discount rate, which doesnt make sense.
The risk premium on a currency?
If the return is less than riskfree interest rate, then you have a negative risk premium.
I don’t understand the concept of negative risk premiums. So from what I know about premiums: they are compensations given to the investor for taking on certain kind of risk. So, a. If the US investor invests in T-Bill, all he gets is RFR, no other compensation. b. If he invests in US Equity then get receives RFR + (Beta) * (Market Risk Premium) c. If he invests in AUS Equity then get receives RFR + (Beta) * (Market Risk Premium) + (Gamma)*(Foreign Currency Risk Premium) Now please make me understand what we mean my -ve risk premiums, Does it mean, the investor is RIPPED OFF some pennies for taking on more risk … that’s rude!! In ICAPM context, on pg-268, they say that we can have negative currency risk premiums???
The premise of the risk adverse investor prevents there from being a negative risk premium on non-currency investments. I think we just had this convo last week with joey weighing in to that effect, do a search on it.