Question: 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 Initial
A 500 $10 7%
B 200 20 12%
C 1,000 8 -2%
Q1. What is the average underpricing of this sample of IPOs?
Q2. 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.
Q3. 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?