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Singer-Terhaar is part of CFA II and III curriculum. It estimates risk premium for some asset, traded at some local market, as weighted average of expected premiums for the case of (1) local market, completely integrated with global, and (2) local market completely isolated from global.

For integrated case, risk premium (RP) for asset i

$$ RP_i = \rho_{i,M} \times \sigma_i \times (RP_M/\sigma_M) $$ ,i.e. correlation of asset with global investable market times deviation times GIM's Sharpe ratio. For isolated case CFA recommends just dropping rho term from the formula above.

Weighting parameter ("integration") is then used to multiply to integrated estimate, and to sum with (1-weighting_parameter) times isolated estimate.

The question is: how to estimate integration?

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