On CAPM and Black–Scholes differing risk-return strategies

In their path-finding 1973 paper, Black and Scholes presented two separate derivations of their famous option pricing partial differential equation. The second derivation was from the standpoint that was Blackʹs original motivation, namely, the capital asset pricing model (CAPM). We show here, in contrast, that the option valuation is not uniquely determined; in particular, strategies based on the delta-hedge and CAPM provide different valuations of an option although both hedges are instantaneouly riskfree. Second, we show explicitly that CAPM is not, as economists claim, an equilibrium theory.