# How do equivalent martingale measures arise in pricing?

I'm studying for an exam in financial models and came across this question:

"An agent with $C^2$ strictly increasing concave utility $U$ has wealth $w_0$ at time 0, and wishes to invest his wealth in shares and bonds so as to maximise his expected utility of wealth at time 1. Explain how the solution to his optimization problem generates an equivalent martingale measure."

The Fundamental Theorem of Asset Pricing states that (roughly) there is no arbitrage iff there's an measure $Q$ such that the discounted stock price process becomes a martingale. So , in our (ideal) market, we have such a measure Q. So I think the question is asking how this measure arises in the solution.

• Using all provided information maybe it's possible to go utility function$\to$non-arbitrage$\to$martingale measure. What can you conclude from the form of the utility function? – Ilya Apr 13 '11 at 20:06