Q asks to calculate the risk premium and in the answer, there is only integrated portion. What happens to segmented portion of the calculation?
Any anyone shed a light on this please?
Bullet Point # 1 (just below the table): “Assume that Swiss market is perfectly integrated with World Markets”
The why did they give 7 and .8 correlation?
integration refers to the ability of capital to flow freely which doesn’t have anything to do with correlation of asset returns.
To make sure you are reading the question.
I’m still not clear on this.
if a country’s market is 100% integrated with the world market, there will be no segmented risk premium.
Do a calculation yourself. Just change the integration to 100%. Therefore Segmentation = (1 - integration) = 0.
Calculate the risk premiums for each, weight them accordingly 100% for the integrated risk premium and 0% for the segmented risk premium, you end up with the fully integrated equity risk premium.