What’s Up with Risk?
Many years ago, when markets were liquid, prices were low and yields were high, I attended a conference in China where I took part in a discussion panel devoted to understanding the investment risk for investors new to Chinese markets. A foreign investor on the panel argued that because he had entered an unknown market, converted his investment capital into a foreign currency and otherwise subjected himself to a host of unknown risks, he felt he should be compensated by receiving higher returns than his home market offered.
This difference in returns is called “risk premium,” and in those good old days, risk premiums were big and fat, generously compensating foreign investors for taking unknown risks, long flights, trouble and inconvenience. There was solid logic behind it. Lack of transparency, frequent changes in government regulations, absence of clearly defined rules and skimpy data for underwriting made investments by foreign investors much riskier than they would be