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.
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