measure of equity risk is the standard deviation in stock
prices; higher standard deviations are generally associated
with more risk. If we scale thestandard deviationof one
market against another, we obtain a measure of relative risk.
This relative standard deviation when multiplied by the
premiumusedforU.S.stocksshouldyieldameasureofthe
total risk premium for any market.
Assume,forthemoment,thatweareusingamaturemarket
premiumfortheUnitedStatesof4.84percent andthatthe
annualstandarddeviationofU.S.stocksis 20 percent.The
annualized standard deviation
19 intheBrazilianequityindexwas 36 percent,yieldinga
total risk premium for Brazil:
The country risk premium can be isolated as follows:
Although this approach has intuitive appeal, there are
problems with comparing standard deviations computed in
marketswithwidelydivergentmarketstructuresandliquidity.
Thereareveryriskyemergingmarketsthathavelowstandard
deviationsfor theirequitymarketsbecausethemarketsare