A Note on Political Risk and the Required Return on Foreign Investment

This note analyzes the impact of political risk on investors ' re-quired return and the multi-national corporation's cost of capital on foreign direct in-vestment using the basic diver-sifia ble-n on diversifia ble dichotomy of portfolio theory. Whether or not a particular political risk affects the value of a multinational corporation through its cost of capital depends on whether the risk is related to investors ' relevant market portfolios. We provide a numerical example that illus-trates the potential impact of political risk on required return