1.The average ER 2 (or VAREX = variance of export revenue) of a group of countries...

1.The average σ ER 2 (or VAREX = variance of export revenue) of a group of countries has been estimated at 20 per cent. The individual VAREX of two countries in the group, Holland and Singapore, has been estimated at 15 per cent and 28 per cent, respectively. The regression of individual country VAREX on the average VAREX provides the following beta (coefficient) estimates:

β H = Beta of Holland = 0.80

β S = Beta of Singapore = 0.20 Based only on the VAREX estimates, which country should be charged a higher risk premium? Explain.

If FIs include unsystematic risk in their estimation of risk premiums, how would your conclusions to part

(a) be affected? Explain. LO 12.3 , 12.4