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    How corporations issue securities

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    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 3 months,
    my investment record is as follows:

    IPO Shares allocated to me Price per share Initial Return
    A 500 $10 7%
    B 200 $20 12%
    C 1000 $8 -2%
    D 0 $12 23%

    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?

    c. Why have I performed so poorly relative to the average initial return on the full sample of IPOs?

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    Solution Summary

    Determine average underpricing.