CAPM

CAPM (Capital Asset Pricing Model) uses several assumptions in order to be used correctly. They are that "...all investors are:

Aim to maximize economic utility.
Are rational risk-averse.
Are price takers, i.e., they cannot influence prices.
Can lend and borrow unlimited under the risk free rate of interest.
Trade without transaction or taxation costs.
Deal with securities that are all highly divisible into small parcels.
Assume all information is at the same time available to all investors. " (By way of Wikipedia. http://en.wikipedia.org/wiki/Capital_Asset_Pricing_Model#Assumptions_of_CAPM)

The CAPM is also used to recognize the efficient frontier, portfolios consisting of two risky assets that fall on the upward sloping portion of the investment opportunity set (
The set of all attainable combinations of risk and return offered by portfolios formed using the available assets in differing proportions.) Along with other financial applications, an analyst can create the optimal portfolio that includes risky assets and non-risky assets that will give the investor an expected return according to his/her risk tolerance. (Anand V., Professor of Finance at Georgia State University. Spring 2008. Reference slides can be provided if necessary.)