Markets are highly efficient. Transaction costs are zero. There are no real restrictions on investment. There are no taxes. No investor is large enough to influence share prices.
Investors have the same expectations about likely return and risk.
This model uses a refined concept of risk. You can diversify away unsystematic risk. A rational investor will diversify away unsystematic risk. So the only risk left to worry about is systematic risk. So the market price of shares must be related to their systematic risk.