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P1.T4.914. The components of country risk include political, legal and economic structure (Damodaran)

Nicole Seaman

Director of FRM Operations
Staff member
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.


914.1. Rebecca works for a socially conscious fund (aka, ESG fund) that employs a scorecard to evaluate international investments. Country risk is a major criteria, and the firm embraces Aswath Damodaran's methodology such that the components of country risk includes life cycle, political risk, legal risk, and economic structure. Political risk, in turn, includes continuous/discontinuous risk, corruption, physical violence, and nationalization/expropriation risk.

Rebecca's fund assigns the greatest weight to physical violence (as a component of political risk) and a key data source is the Global Peace Index (GPI, see visionofhumanity.org). Among the following four countries, according to the 2018 GPI, which is the LEAST peaceful; i.e., has the worst peace score?

a. United States (USA)
b. Canada
c. Australia
d. Portugal

914.2. Peter works for an ESG fund that evaluates political risk. Among the components of political risk, Peter's fund assigns the greatest weight to corruption. If corruption is the most important criteria, into which of the following countries is Peter's firm MOST LIKELY to invest; i.e., which is least corrupt?

a. Libya
b. Mexico
c. Venezuala
d. New Zealand

914.3. Sally works for a fund that has a mandate to allocate a certain portion of its fund to developing (and/or emerging) countries in Asia, Africa or South America. However, the fund is sensitive to country risk, and in particular, the country's economic structure. With respect to economic structure, the fund seeks to avoid countries with a high degree of commodity export dependence. According to this criteria, which of the following countries is preferred; i.e. which is the LEAST dependent on commodity exports?

a. Chile
b. India
c. China
d. Saudi Arabia

Answers here: