Risk premium for equities

CFA Level III Economics
#1

Hello,

Here is the question:

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The question then asks: what is the forecast of the expected return for small-cap emerging market equities?

Using the Singer and Terhaar approach and taking a weighted average of the risk premium calculated under the full integration and full segmentation approach, I get the expected return as 8.9%

However, CFAI says the correct answer is 9.5% and says the liquidity premium needs to be added. But why? Isn’t any liquidity premium already captured in the risk premium calculated under the Singer and Terhaar approach?

#2

(https://www.reddit.com/r/CFA/comments/1mh5hh6/risk_premium_for_equities/)

#3

No.

2025 Level III CFA core curriculum, volume 1, Learning Module 2 (Capital Market Expectations, Part 2: Forecasting Asset Class Returns), §5 (Forecasting Equity Returns), p. 90, first paragraph.

#4

Thanks so much @S2000magician

#5

My pleasure.