Factors Affecting Required Rates of Return

C

All of the mentioned variables affect the RFR because they affect an investment's real return.

The factors that account for differences among required rates of return for different countries include:

A. Different risk premiums due to different risk environments: The required rate of return is influenced by the risk associated with investing in a particular country. Different countries have varying levels of political, economic, and financial risk. These risks can arise from factors such as government stability, regulatory environment, legal system, corruption levels, and macroeconomic conditions. Investors demand higher returns to compensate for higher levels of risk in certain countries.

B. Wide variance in inflation rates: Inflation is the rate at which the general price level of goods and services in an economy is increasing over time. Inflation erodes the purchasing power of money, which affects investment returns. Countries with high inflation rates typically have higher required rates of return to offset the expected loss of purchasing power. On the other hand, countries with lower inflation rates may have lower required rates of return.

D. Exchange-rate volatility: Exchange-rate volatility refers to the fluctuations in the value of one currency relative to another. Changes in exchange rates can have a significant impact on international investments. When investing in a foreign country, investors face the risk that the value of their investment may decline due to unfavorable exchange-rate movements. This risk adds to the required rate of return. Countries with higher exchange-rate volatility may have higher required rates of return to compensate for the additional risk.

Therefore, the correct answer is C. All of these answers. The required rates of return for different countries can vary due to different risk premiums, wide variance in inflation rates, and exchange-rate volatility. These factors reflect the risks associated with investing in specific countries and impact the returns expected by investors.