treynor black chapter confusion

in the treynor black chapter before you get into TB itself, it says on page 468 (2nd page of chapter), “recall that the proper allocation of investment funds…” and then it directly gives this formula to back it up… y = Erm - rf DIVIDED BY 0.01xAxVARIANCEM… A = investor’s coefficient of risk aversion anyhow, this formula is completely foreign to me… what are we “recalling” this formula from? … is this bad editing where the comment refers to a prior chapter in the book they got this reading from?.. did i miss this formula earlier in the book?.. is this from level 1 which i took many years ago??? thanks in advance!!!.. i don’t remember much at all on investor’s risk aversion, although i know that it’s highest curve that is tangential to CML line. thanks in advance!!

I think this is a framework based on CAPM. It tells you how much to invest in the market portfolio based on your level of risk aversion. TB only tells you how to invest the risky part of your portfolio, and how much of the risky asset should be actively managed. It doesn’t tell you how much to allocate to the risk free asset. I think that formula helps you make that decision.

danteshek, thanks much appreciated… but they said “recall” and i don’t remember it anywhere else…

I don’t recall it either. Dont’ worry about it. I spent 5 hours last night on readings 70 and 71. Trying to make up for my laziness earlier in the cycle. Tonight I re-read pension accounting and brush up on corp fin.