in Risk and Agencies of Restraint: Reducing the Perceived Risks of African Investment, Cathy Pattillo, Ed., Oxford University, forthcoming.

The Risk and Expected Returns of African Equity Investment

Claude B. Erb
First Chicago NBD Investment Management Co., Chicago, IL 60670

Campbell R. Harvey
Duke University, Durham, NC 27708
National Bureau of Economic Research, Cambridge, MA 02138

Tadas E. Viskanta
First Chicago NBD Investment Management Co., Chicago, IL 60670

Abstract

The idea of this paper is to develop a simple country risk model that can be used to establish expected rates of return, volatility and correlations for African equity markets. These rates are appropriate for markets that are segmented in the sense that the same risk project may receive a different expected return, depending on its domicile. The model uses Political Risk Servicesí International Country Risk Guide (ICRG) country risk ratings. We establish rates that represent expected returns on investments of average risk within each country. These expected returns are forward-looking. We also calculate expected volatilities and correlations for each of the countries.