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Return from IPO investment

The following problem is an example of a firm going public and IPOs. Can you provide an example or hints to the solution.

(See attached file for full problem description)

Having heard about IPO underpricing, I put in an order to my broker for 1,000 shares of every IPO he can
get me. After 3 months, my investment record is as follows:

IPO Shares Price per
return Allocated to Me Share
A 500 $10
B 200 20
C 1,000 8

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?


Solution Preview

1. The average underpricing is the weighted average of the price ...

Solution Summary

The solution explains how to calculate the returns from investing in an IPO