Country risk premium

An addition to the equity risk premium for businesses exposed to a market with higher political, legal or currency risk than the mature base.

A practitioner using a 4.5% mature-market premium and a 2% country premium would work with 6.5% for a company whose revenue comes entirely from that market.

The standard construction starts from the sovereign default spread, measured either from a dollar bond issued by the government or from a credit default swap, and scales it up to reflect that equities are riskier than sovereign debt.

Exposure should be weighted by where the revenue is, not by where the company is listed. An Indian information technology firm earning 80% of its revenue in North America carries far less Indian country risk than a domestic cement maker.

Weight by revenue, not by address.