Problem: 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%
1. What is the average underpricing of this sample of IPOs?
2. What is the average initial return on my "portfolio" of shares purchased from the four IPOs I bid on?
3. Why have I performed so poorly relative to the average initial return on the full sample of IPOs?