The capital asset pricing model was created because the assumptions in the Modigliani-Miller Theorem created an ideal world or a pure theory. The CAPM was adjusted with a beta which describes how the company relates to the market. CAPM works with all the M and M assumptions but uses beta to tell you if the company is more or less sensitive to the market. CAPM turns out to have some assumptions as well. The first assumption is that we have perfect information about our risks, investments, revenues, costs, etc. Second, there are no transaction costs to reducing risk. Third, there are many well diversified shareholders. Forth, there are no taxes, and fifth, there are no agency costs. We know these assumptions are not true. Most common shareholders do not have well diversified portfolios to hedge against risk. There are taxes, and managers are not always acting in the best interest of the shareholders causing agency costs.