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Explain the process by which the stock price will adjust

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Problem 1: Consider two stocks that are assumed to be correctly priced.  Stock A has an expected return of 13.28% and a beta of 1.25. Stock B has an expected return of 10.12% and a beta of 0.85. Determine, using the capital asset pricing model, a) the risk-free rate, and b) the market risk premium.

Problem 2: Suppose a particular stock has a higher price than what it normally should be in market equilibrium. Explain the process by which the stock price will adjust to be correctly priced.

Reference no: EM133006159

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