Finance is a very essential sector in any type of organization to achieve success. It contains many financial theories that have been developed over the years based on particular circumstances such as time, money, demand and supply. One of the important financial theories is the financial asset pricing model which gives investors, individuals or companies, the opportunity to be more realistic in their investments by taking into account market risk. This article will explain what the financial asset pricing model is, then it will describe the theoretical foundations of the CAPM and conclude with the evaluation of the CAPM. First, to have a good explanation of the theory, the historical context must be explained. The financial asset pricing model is a theory development of Markowitz's portfolio theory. Markowitz's portfolio theory was discovered in 1952 and was awarded the Nobel Prize in Economics in 1990 (Watson & Head, 2006). The theory gives investors the ability to avoid disjointed risks by choosing a variety of portfolios containing a different number of shears. Markowitz's first point is to construct the envelope curve which gives the maximum return or minimum risk for a given return stage, this shows investors a group of portfolio choices available when investing in a set of assets risky and advises investors to invest in a particular portfolio (Watson & Head, 2006). However, portfolio theory has many problems in practical application, such as: the ability of investors to borrow at a risk-free rate is unrealistic, the theory has difficulty identifying the market portfolio and after identifying the composition of the portfolio market, its construction is expensive due to the transaction cost which is not taken into account...... middle of paper ...... is the line of the securities market which is the covering relationship between risks and returns (Watson & Head, 2006). In the securities market, investors want bonuses added to what they receive on risk-free investments to entice them to invest in something risky like shears (Arnold, 2008). This makes the security market line important for investors because it identifies market risk as a systematic risk (Arnold, 2008), which should be compared to market risk and return and the risk-free rate of return. This comparison is necessary to calculate two elements which are: the return requested for security and the fair price (Watson & Head, 2006) Works cited Watson, DW & A.Head (2006), corporate finance: principles and practice Essex: Pearson Educational Limited. Arnold, G (2008) Business Financial Management Essex: Pearson Educational Limited.