You are trying to estimate a country equity risk premium for Poland.

You find that S&P has assigned an A rating to Poland and that Poland has issued euro-denominated bonds that yield 7.6% in the market currently. (Germany, a AAA-rated country, has euro-denominated bonds outstanding that yield 5.1%.)

a. Estimate the country risk premium, using the default spread on the country bond as the proxy.

b. If you were told that the standard deviation in the Polish equity market was 25% and that the standard deviation in the Polish euro bond was 15%, estimate the country risk premium.