The standard deviation in the Mexican Equity Index is 48%, and the standard deviation in the S&P 500 is 20%. You use an equity risk premium of 5.5% for the United States.

a. Estimate the country equity risk premium for Mexico using relative equity standard deviations.

b. Now assume that you are told that Mexico is rated BBB by Standard & Poor’s and that it has dollar-denominated bonds outstanding that trade at a spread of about 3% above the Treasury bond rate. If the standard deviation in these bonds is 24%, estimate the country risk premium for Mexico.