Suppose that as the economy moves through a business cycle, risk premiums also change. For example, in a recession when people are concerned about their jobs, risk tolerance might be lower and risk premiums might be higher. In a booming economy, tolerance to risk might be higher and risk premiums lower.

a. Would a predictably shifting risk premium such as described here be a violation of the Efficient Market Hypothesis?

b. How might a cycle of increasing and decreasing risk premiums create an appearance that stock prices 'overreact', first falling excessively and then seeming to recover?