What are the assumptions for the CAPM to work?

In order for the CAPM to work, the firm has to be publicly traded and have many shareholders with diversified portfolios. CAPM assumes that management of a firm is risk neutral and there are no agency problems. It also assumes that there are no taxes or transaction costs. CAPM is a model that suggests that risk management does not add value to a firm. The problem with that is the assumptions under CAPM are unrealistic. In a real market, there are taxes and transaction cost and management does not always make risk neutral decisions. For these reasons, risk management can add value to a firm when done efficiently.