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# IPO underpricing

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IPO Underpricing

Having heard about IPO underpricing, I put in an order to my broker for 1,000 shares of every IPO he can get for me. After three months, my investment record is as follows (see attachment for investment record).

A) What is the average underpricing of this sample of IPOs?

B) What is the average initial return on my "portfolio" of shares purchased from the four IPOs I bid on? Calculate the average initial return, weighting by the amount of money invested in each issue.

C) Why have I performed so poorly relative to the average initial return on the full sample of IPOs? What lessons do you draw from my experience?

(Question and Detailed Information in Attachment)

#### Solution Preview

A.
The average under-pricing = [7% + 12% - 2% + 23%]/4 = 10%.

B.
Total amount invested = 500 * \$10 + 200 * \$20 + 1,000 * \$8 + 0 * \$12 = \$17,000.
Initial return = 500 * \$10 * 7% + 200 * \$20 * 12% + 1,000 * \$8 * -2% + 0 * \$12 * 23% = \$670.
Average initial return = \$670/\$17,000 = ...

#### Solution Summary

This solution looks at IPO underpricing.

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