Mohd Yusoff, Liza Marwati Binti; Samad, Fazilah Abdul; Azizan, Nor Azlinna
June 2010
International Journal of Business Strategy;Jun2010, Vol. 10 Issue 2, p99
Academic Journal
The aims of the paper is to unravel the way rationality is embedded in the theory of asset pricing, and whether the opportunity to consistently obtain abnormal return is explicitly or implicitly mentioned in the theory of asset pricing. The imperfections in asset pricing model, a model developed based on the theory of asset pricing, from theoretic approach could also be readily seen from this paper. The discussion in the paper reveals that rationality as defined by the economic maxims is embedded in the first main idea and the third main idea of the three main ideas in the theory of asset pricing. In fact, rationality as defined by Fama (1965) had also been found to be embedded in the third of the three main ideas in the theory of asset pricing. Nevertheless, the two definitions of rationality appeared not to be embedded in the second main idea of the three main ideas in the theory of asset pricing. The theory of asset pricing however had been found not to explicitly express its view on the ability to consistently obtain abnormal return from share markets. However, since the theory requires investors to be rational as defined by Fama (1965), it could be deduced that the theory of asset pricing theory implicitly believes that abnormal return could not be consistently gained from share market.


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