For practice, we calculate the expected returns for both markets. First, we calculate the equity risk premium for both markets assuming full integration. Note that for the emerging market, the illiquidity risk premium is added in:
Next, we calculate the equity risk premium for both markets assuming full segmentation:
We then weight the integrated and segmented risk premiums by the degree of integration and segmentation in each market:
The expected return in each market figures in the risk-free rate:
