COUNTRY RISK AND RISK PREMIUM FOR PORTFOLIO INVESTMENTS: AN EXAMINATION OF BRICS NATIONS
Published: 29 Aug 2014
Abstract: Country risk has become a key variable for investors to choose among global destinations. As the risk and return of destinations are different, investors have to be selective in the case of destinations to construct a global security portfolio. Determination of Expected Rate of Return (ERR) on investment reflecting the Country Risk Premium (CRP) is inevitable to proced with investment decision. BRICS nations are one of the largest economic groupings with more than 40 per cent of the world population, nearly 30 per cent of the total landmass and 19 per cent of world GDP. They are emerging as global investment destinations for parking funds in securities expecting globally higher returns. The present paper examined the country risk of BRICS nations in terms Annualized Relative Standard Deviation (ARSD) by benchmarking US Dow 30 Index and South Africa’s FTSE Index and found that, in terms of country risk, South Africa is the most favourable nation for equity investment with lower ARSD and Russia is the most unfavourable nation with higher ARSD. Further, the computed CRP of the nations which facilitates the computation of ERR on investment in each country revealed that it is volatile for all the nations during the six year period of analysis. Noticeably, South Africa stands with exceptionally lower and negative Country Risk Premium indicating better performance variation in return than the benchmark US’s investment returns.
Keywords: country risk, country risk premium, brics, foreign portfolio investment
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