Question

Which of the following statements with respect to political risk is true?

Oa. Political risk premiums are added to the required rate of return to adjust for political risks.
b. Companies cannot take any steps to reduce the potential from loss from expropriation since a foreign
government is involved.
Oc. The risk of expropriation of U.S. assets abroad is high even in traditionally friendly and stable countries.
Od. A company can reduce political risk by structuring operations so that the subsidiary has value only as a part of the
integrated corporate system.

Answer 1

a. Political risk premiums are added to the required rate of return to adjust for political risks.

This statement is true. Political risk is the risk of loss in an investment due to political instability or changes in government policy. Companies can adjust for the potential impact of political risk by adding a political risk premium to their required rate of return. This premium compensates investors for the additional risk associated with the investment due to political factors. The size of the premium will depend on the specific country, the nature of the investment, and the perceived level of political risk. Companies can also take steps to reduce political risk, such as diversifying their operations, investing in political risk insurance, or structuring operations to minimize the value of a subsidiary that might be subject to expropriation.