Session 6: Company exposure to country risk and Implied Equity Risk Premiums

In this session, we started by doing a brief test on the relationship between prices and risk premiums. We spent the rest of the session talking how companies get exposed to country risk, with the foundational principle that it where you do business that determines your risk, not where you are located. If you are interested in the old paper that I have on estimating lambda, and it is definitely not a barn burner, try this link: https://people.stern.nyu.edu/adamodar... We spent the rest of the class about the dynamics of implied equity risk premiums and what makes them go up, down or stay unchanged. We then moved to cross market comparisons, first by comparing the ERP to bond default spreads, then bringing in real estate risk premiums and then extending the concept to comparing ERPs across countries. Finally, I made the argument that you should not stray too far from the current implied premium, when valuing individual companies, because doing so will make your end valuation a function of what you think about the market and the company. If you have strong views on the market being over valued or under valued, it is best to separate it from your company valuation. Start of the class test: https://www.stern.nyu.edu/~adamodar/p... Slides: https://www.stern.nyu.edu/~adamodar/p... Post class test: https://www.stern.nyu.edu/~adamodar/p... Post class test solution: https://www.stern.nyu.edu/~adamodar/p...