Country Risk Premium Calculator
When valuing a business or investment in an emerging or frontier market, investors add a country risk premium (CRP) to the cost of equity to account for political risk, economic instability, and weaker investor protections relative to a mature market benchmark. The standard approach, popularised by Professor Aswath Damodaran, is to add the CRP (multiplied by a company-specific lambda factor) to the base CAPM cost of equity. This calculator computes the adjusted cost of equity using these inputs. Obtain the CRP for your target country from Damodaran's annual published tables.
Country risk premium formula
CRP contribution = CRP x lambda
Adjusted cost of equity = base cost of equity + CRP contribution
Lambda captures how exposed the specific firm is to the country risk being measured. A lambda of 0 means the company has no exposure to the country (fully offshore revenues). A lambda of 2 would apply to a heavily leveraged purely local company with amplified sensitivity to country conditions.
Using CRP in practice
- Use Damodaran's January estimates as the starting CRP for valuation work. The dataset covers 170+ countries.
- The CRP is derived from the sovereign default spread (based on Moody's/S&P rating) multiplied by the ratio of equity to bond market volatility in the country.
- For a US multinational investing in Brazil, adjust lambda based on the fraction of Brazilian revenues relative to total revenues.
- Country risk affects both the discount rate and the cash flow projections (political risk, currency risk, expropriation risk).
Frequently asked questions
What is a Country Risk Premium (CRP)?
A Country Risk Premium is an additional return demanded by investors for the extra risk of investing in a country with weaker institutions, higher political risk, or greater economic volatility compared to a risk-free base market such as the US.
How is the CRP calculated by Damodaran?
Professor Aswath Damodaran (NYU) estimates CRP as: CRP = (country default spread) x (equity market volatility / bond market volatility). The country default spread comes from sovereign credit ratings. NYU publishes updated CRP estimates annually at pages.stern.nyu.edu.
How is the total cost of equity estimated?
Total cost of equity = base cost of equity (from CAPM in a base market) + lambda x CRP, where lambda is the exposure of the specific company to country risk. Lambda equals 1 for a purely local company, less for multinationals with diversified revenues.
What is the equity risk premium (ERP)?
The equity risk premium is the expected return of the equity market above the risk-free rate. For the US market, Damodaran estimates the implied ERP annually based on current market prices and dividend/earnings forecasts.
Where do I find official CRP data?
Professor Damodaran publishes free country risk premium estimates at pages.stern.nyu.edu/~adamodar/. Ratings agencies (Moody's, S&P, Fitch) publish sovereign credit ratings that form the basis for the default spread component.
Official sources
- Damodaran Online, Country Risk Premium data: pages.stern.nyu.edu.
- World Bank, Sovereign Ratings by Country: data.worldbank.org.
- IRS, US Income Tax Treaties: irs.gov.
Reviewed by the CalculatorHub team, edited by James Graham, 15 June 2026. See our methodology.