We can write the equation for return on equity using the CAPM as:
Re = Rf + ꞵ (ERP +CRP)
Where,
ERP = Equity risk premium, and
CRP = Country risk premium.
We can find the value for country risk premium by finding the value of sovereign yield spread. Sovereign Yield Spread is nothing but the government yield in the developing country reduced by the amount of Treasury bond yield in a developed country.
Sovereign Yield Spread = Government Yield (Developing Country) – Treasury Bond Yield (Developed Country)
And, the country risk premium is nothing but the sovereign yield spread times the ratio of the volatility of debt and equity markets (both in terms of developing country’s currency). That is:
Country Risk Premium = Sovereign Yield Spread × σe / σd