IPO Underpricing. 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 three 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 1,000 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? Calculate the average initial return, weighting by the amount of money invested in each issue.
c. "You have just encountered the problem of the winner's curse." True or False?