Let me use Turkey as an example.
There’s this idea that investors should require an extra risk premium when they invest outside the US. Sure, we can debate the whole “US exceptionalism” thing, but leaving that aside…
According to CAPM, you shouldn’t get compensated for risks you can diversify away. For instance, most European markets are pretty tightly correlated with the global market. So, no matter how much you diversify, you’re still basically exposed to the same risks.
Turkey, though, is different. Since the 2018 shift to the presidential system, its correlation with the MSCI World Index has been just 0.36, with an R² of 0.13. That’s really low. It basically means Turkey doesn’t move with world markets, so if you diversify, you can actually wash out most of its country-specific risks.
So my question is: why do we still tack on an extra risk premium for Turkey?
And here’s a bonus thought: Turkey’s equity risk premium has been close to zero, or even negative, whether you look from 2000 or from 2018. So investors might want an extra return for the risk, but the market itself doesn’t actually provide it. At the end of the day, your opportunity cost is what the real market gives you, and in Turkey’s case, that “extra risk” doesn’t translate into extra return.
https://testfol.io/?s=j86M1wQwMgN