Question Discussion: Home Country Bias

CFA Level III Economics
#1

Hi All,

Interested to look into this questions?

On Vol 3 Page 46, Q3:

“The ZCM risk premium estimates are low because of the home country bias”

Answer on Page47 is : Not correct. Because the equilibrium risk premium is determined by all investors, reflected in the overall degree of integration estimates.

I don’t quite understand the Question. The fund forecasts the Expected Return for 5 markets respectively. So how does the respective Risk Premium relate to the Home Country Bias of the overall fund?

I mean, the forecast is done without any consideration of this fund’s strategy, right? The estimates for Market return can be applied universally.

Thanks for your help!

#2

Their question is whether the statement that “ZCM Risk premium is low because of home country premium” is TRUE or FALSE.

they are stating that the particular statement is NOT CORRECT. If there had been a home country bias, then the risk premiums would have been lower. However - since the risk premiums are obtained by looking at the entire market as a whole - if they are really low - then that must be due to other factors - not home premium.