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Return from IPO investment

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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?

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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