What is a 'Country Risk Premium - CRP'
A country risk premium (CRP) is the additional risk associated with investing in an international company rather than the domestic market. Macroeconomic factors such as political instability, volatile exchange rates and economic turmoil causes investors to be wary of overseas investment opportunities and thus require a premium for investing. The country risk premium (CRP) is higher for developing markets than for developed nations.
BREAKING DOWN 'Country Risk Premium - CRP'
The CAPM can be adjusted to reflect the additional risks of international investing by adjusting the model for the CRP.
Re = Rf + β(Rm – Rf + CRP)
As expected by general financial theory, investors seeking to invest into a region such as Zimbabwe must be compensated with greater expected returns.