ICAPM

[MrSmart]

It says that the expected return according to the ICAPM is the Rf + B (Rm-Rf). Where Rf is the domestic risk free rate, and Rm is the expected return on the GIM (or otherwise).
If used for an emerging market, then the Rf would most likely be larger than Rm, giving a negative ERP, is this normal?

 

[S666]

Is government debt in an emerging market really risk free? I haven’t read the material yet so I’m speaking more generally but perhaps from a logical perspective the “risk free” rate in an emerging market actually needs to be revised heavily downward to get into the realms of truly risk free.

 

[MrSmart]

So basically, it’s the real risk free rate according to the PPP, and then you add the currency’s expected inflation?
That makes sense in practice, but that’s not what is implied in the material.

 

[sharky7]

From a logical point of view (not read that part yet), it seems to me that you have tu update the whole formula, and of course apply it consistently in terms of currency, no?
I think if you take Rf for an emerging market, this Rf should reflect the risk-free rate of that market, and the Rm should also be the respective of that market. Then, it makes sense to me to factor in the currency’s expected appreciation/deppreciation to get the domestic return.