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Abstract
This dissertation explores the application of the multi-dimensional Brownian motion model to asset pricing. Economic factors and traded assets are represented in a continuous time mean-variance (MV) framework. Using a state interpretation, no-arbitrage relationships relate all traded processes via their market prices of risk, visualized by their Sharpe ratios on the MV diagram. Asset sub-markets and factor pricing with betas are discussed. Economic processes, including the stochastic discount factor, the Radon-Nikodyn derivative and the growth optimal portfolio can also be shown graphically on the MV diagram. Finally, optimal consumption and portfolio choice are examined and illustrated casing the specific case of constant relative risk aversion (CRRA) preferences.
