Country Risk Premium

The Country Risk Premium is an extra return that investors demand when investing in a country that may have political, economic, or social risks. This premium compensates for the higher uncertainty associated with investing in that nation compared to a more stable environment. For example, if two countries offer similar investment opportunities, but one is politically unstable, the investor will expect a higher return from the riskier country to offset the potential for loss or reduced gains. Essentially, it reflects the additional risk linked to the specific country’s circumstances.