Country Risk Premium

A country risk premium is extra return added to cost of equity for a business exposed to a country with more political, economic or currency risk than a mature market. It is added to CAPM or the build-up method as its own line.

Start with a mature-market cost of equity, such as 11% from a 5% risk-free rate, a 1.2 beta and a 5% premium. Adding a 3% country premium gives 14%. If you scale it by beta instead, the result is 14.6%. Analysts often base the premium on the spread between the country's government bonds and US Treasuries.

The FAQ on how to add a country risk premium to cost of equity compares the methods. It is one of the things that increases cost of equity. See also equity risk premium and the build-up method.