3.

1 The Complete Case 39

T (x) in (3.19) exists, is unique and satisfies

(ii) The optimiser X
 
 dQ dQ T (x)),
XT (x) = I y , or, equivalently, y = U  (X (3.20)
dP dP

where x ∈ dom(U ) and y > 0 are related via u (x) = y or, equivalently,
x = −v  (y).
(iii) The following formulae for u and v  hold true:
  
u (x) = EP [U  (XT (x))], v  (y) = EQ V  y dQ (3.21)
dP
   
xu (x) = EP X T (x)U  (XT (x)) , yv  (y) = EP y dQ V  y dQ . (3.22)
dP dP

Proof. Items (i) and (ii) have been shown in the preceding discussion, hence
we only have to show (iii). The formula for v  (y) in (3.21) and immediately
follows by differentiating the relation
    N  
dQ
v(y) = EP V y = pn V y pqnn .
dP n=1

Of course, the formula for v  in (3.22) is an obvious reformulation of the

one in (3.21). But we present both of them to stress their symmetry with the
formulae for u (x).
The formula for u in (3.21) translates via the relations exhibited in (ii)
into the identity  
dQ
y = EP y ,
dP
while the formula for u (x) in (3.22) translates into
   
  dQ dQ
v (y)y = EP V y y ,
dP dP

which we just have verified to hold true.

Remark 3.1.4. Let us recall the economic interpretation of (3.20)

 
U X T (x)(ωn ) = y qn , n = 1, . . . , N.
pn
This equality means that in every possible state of the world ωn , the marginal
T (x)(ωn )) of the wealth of an optimally investing agent at time
utility U  (X
T is proportional to the ratio of the price qn of the corresponding Arrow se-
curity 1{ωn } and the probability of its success pn = P[ωn ]. This basic relation
was analyzed in the fundamental work of K. Arrow and allows for a convinc-
ing economic interpretation: consider for a moment the situation where this