LOS 18.66.k - market segmenatation on ICAPM

  1. Why in the long run will the currency risk premium equal to zero? I can understand the short run - currencies fluctuates all the time. 2. What’s in the world market risk premium (WMRP) - what’s the E® of the world market - what kind of index would we use for that?
  1. I assumed this to be that currencies in the long run will flucuate around a mean value, sometimes one currency apreciates in the short run, sometimes it’s the other currency that appreciates. so in the long term these movements net out to 0 2. on the test they will give you the WMRP, but in real life if you plan to use the ICAPM there are world mkt indexes available out there, or you could create your own depending on the countries you hold specifically.