country risk

• Country risk can be largely diversified away.
• Hence, the addition of country risk to discount rates is not the preferred way for valuing emerging market stocks.
• Scenario discounted cash flow method is recommended as the prime valuation approach.
• A common method for deriving a country risk premium does use the spread between U.S. Treasuries and local bonds that are dollar denominated, but this approach is realistic ONLY if the returns of local debt and equity investments are highly correlated.
• Such a premium is difficult to apply to individual securities because different industries are affected by country risks in different ways.