Blue box example 19: Setting CME using Singer Terhaar approach from CFAI text Vol 3, 2013
It is given in the vignette that “the foundation limits nondomestic assets to no more than 12% of invested assets”
Critique the following statement: “The risk premium estimates are low, given that the foundation has a very strong home country bias reflected in its limiataion of nonodomestic assets to no more than 12%.”
Answer: “Although the client is correct about the foundations’ home country bias, the point being made is not correct. The equilibrium risk premium is determined by all investors, reflected in the overall degree of integration estimates”
I don’t understand this part- “determined by all investors, reflected in the overall degree of integration estimates”. Can someone please clarify what does this mean? Thanks.