Use for the dollar amount invested in the stock; the number of shares is . The bank account contains dollars. With no intermediate consumption, the self-financing portfolio equation is
If instead denotes share holdings, replace each dollar here by . The equation says that trading only reallocates existing portfolio wealth; gains come from cash interest and stock returns.
For the standard unconstrained complete-diffusion formulation, assume the completed natural Brownian filtration, initial wealth , and nonnegative admissible wealth. Define the market price of risk . The boundedness assumptions make bounded. The state-price density normalized at zero is
Its money-market-adjusted process is a true martingale by the Novikov condition. Under , the Girsanov theorem gives as a Brownian motion, and the discounted stock has zero drift.
The Itô product rule applied to the wealth equation gives
For nonnegative admissible wealth this is a nonnegative local martingale, hence a supermartingale. Therefore every affordable terminal payoff satisfies the state-price budget constraint . Nonzero volatility and the Brownian martingale representation theorem allow replication of nonnegative claims with finite state-price cost.
For a differentiable strictly concave utility function with the usual conditions ensuring an interior integrable optimizer, put , the inverse marginal utility. Pointwise maximization of gives
The second equation determines the positive constant . To prove optimality, use the concave supporting-tangent inequality:
Taking expectations and using the budget bound proves that the candidate dominates every admissible affordable payoff, whenever the utility expectations are well defined. This is the complete-market terminal utility optimizer.
The actual wealth and dollar portfolio are as explicit as general adapted coefficients permit. Let
The Brownian martingale representation theorem, with localization if only integrability is initially known, gives . The dollar portfolio from a deflated wealth martingale is
The bank holds dollars. Equivalently, with , . These formulas need no unjustified differentiability of a value function with random coefficients.
The printed assumption that is only increasing and concave does not guarantee that the interior formula exists, or even that the optimal value is finite. In general replace the inverse formula by an affordable selection
where is the wealth domain; boundary choices or supporting slopes handle nondifferentiability. Existence, finite cost and replication still have to hold. A concrete obstruction is the unbounded linear terminal-wealth utility: take , , , and the Brownian filtration. Then . For , the bounded nonnegative claim
is replicable, costs , and has . Thus there is no finite optimal expected utility under the literal utility hypotheses alone. Also, bounded coefficients do not ensure market completeness in an arbitrarily enlarged filtration containing untraded randomness; the full replication formula uses the Brownian market information assumption stated above.