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P1.T4.600. Sources of country risk (Damodaran)

Nicole Seaman

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Learning objectives: Identify sources of country risk. Explain how a country’s position in the economic growth life cycle, political risk, legal risk, and economic structure affect its risk exposure.


600.1. Your colleague Sally has identified the following four countries and included them in a list of countries deemed to offer an excessive degree of country risk with respect to your firm's portfolio. For each country, she provided a justification. Each of the following is a valid argument for the presence of high country risk EXCEPT which is not strictly speaking a compelling argument, at least according to Damodaran's sources of county risk? (note: please assume all cited statistics are true)

a. Columbia (in South America) because commodity exports constitute over 80% of merchandise exports
b. Ukraine (in Eastern Europe) because it scores in the bottom quintile (bottom 20%) with respect to the protection of legal, physical and intellectual property rights
c. Myanmar (in Southeast Asia) because it is a young and less developed economy (e.g., lower per capita GNI) although it is growing rapidly (+7.6% in 2014, second highest according to World Bank)
d. Italy (in Western Europe) because its per capita GDP has shrunk in each of the most recent three years (-3.1% in 2012, -2.9% in 2013 and -1.4% in 2014, as reported by the World Bank) despite being a large, mature economy

600.2. Political risk includes governmental stability (versus volatility), level of corruption, physical violence and expropriation risk in a country. Which of the following is TRUE about political risk?

a. Singapore is among the most corrupt countries (according to Transparency International)
b. Russia is among the most peaceful countries (according to the Global Peace Index)
c. The three Scandinavian kingdoms are among the least corrupt countries (according to Transparency International)
d. Over the last decade, nationalization risk has been in stark decline globally because businesses prefer to have their overseas profits expropriated for tax reasons

600.3. According to Damodaran, which of the following is TRUE about political risk with respect to forms of government?

a. Democracies create discontinuous risk rather than continuous risk
b. Dictatorships create continuous risk rather than discontinuous risk
c. Among the major forms of the government, democracies are conclusively more conducive to higher economic growth
d. In comparing democracies to dictatorships, it is difficult to draw a strong conclusion about which system is more conducive to higher economic growth

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