Page 37 - FINAL CFA SLIDES DECEMBER 2018 DAY 11
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Session Unit 10:
36. Cost of Capital
Beta estimation challenges:
• Done using historical returns data - hence sensitive to the length of time;
• Affected by which index is chosen to represent the market return.
• May need to adjust upwards to reflect risk of small-capitalization firms!
LOS 36.j: Describe uses of country risk premiums in estimating the cost of equity., p. 51
tanties
• Country risk premium - increased risk associated with investing in a developing country.
• Sovereign yield spread -difference in yields between the developing country’s government
bonds (in say $) and Treasury bonds of a similar maturity for a developing country (in $S).
To estimate an equity risk premium for the country, adjust the sovereign yield spread by the
ratio of volatility between the country’s equity market and its government bond market. A
more volatile equity market increases the country risk premium, other things equal.
