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Suppose that you receive 50 shares in "very successful" IPOS, 400 shares in "successful" IPOS, and 1050 shares in "unsuccessful" IPOS. The average IPO price is £15/share. b. What is your average investment in IPOS? c. What is your expected return and why is it lower than the average IPO underpricing?

Suppose that you receive 50 shares in "very successful" IPOS, 400 shares in "successful" IPOS, and 1050 shares in "unsuccessful" IPOS. The average IPO price is £15/share. b. What is your average investment in IPOS? c. What is your expected return and why is it lower than the average IPO underpricing?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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You requested your broker 1050 shares of all available IPOs. Suppose that on the first day, in 1/10 IPOs stock appreciates 72% (very successful); in 8/10 IPOs stock appreciates12% (successful); in 1/10 IPOs stock depreciates -15 (unsuccessful).

**Understanding Investments in IPOs** *Suppose that you receive 50 shares in "very successful" IPOs, 400 shares in "successful" IPOs, and 1050 shares in "unsuccessful" IPOs. The average IPO price is £15/share.* **b. What is your average investment in IPOs?** To calculate your average investment in IPOs, you can follow these steps: 1. Determine the total number of shares: \(50 \text{ (very successful)} + 400 \text{ (successful)} + 1050 \text{ (unsuccessful)} = 1500 \text{ shares}\) 2. Multiply the total number of shares by the average price per share: \(1500 \text{ shares} \times £15/\text{share} = £22,500\) So, your average investment in IPOs is £22,500. **c. What is your expected return and why is it lower than the average IPO underpricing?** To determine your expected return and understand why it might be lower than the average IPO underpricing, you need to consider the performance of each type of IPO (very successful, successful, and unsuccessful): 1. Evaluate the gains from each type of IPO: - Very successful IPOs often yield high returns. - Successful IPOs yield moderate returns. - Unsuccessful IPOs yield little to no returns or even losses. 2. Calculate the expected return: This requires taking the weighted average of the returns based on the number of shares you have in each category. Your overall expected return will depend on the proportion of shares in each category and their respective performances. Because you have a much larger number of shares in unsuccessful IPOs (1050 shares) compared to the very successful (50 shares) and successful IPOs (400 shares), your overall return would be influenced heavily by the poor performance of the unsuccessful IPOs. This results in a lower expected return compared to the average IPO underpricing, which does not take into account the distribution of shares among different performance categories. --- This detailed explanation helps in understanding the average investment in IPOs and provides insights into why the expected return might be lower due to the distribution of shares across different performance levels of IPOs.
Transcribed Image Text:**Understanding Investments in IPOs** *Suppose that you receive 50 shares in "very successful" IPOs, 400 shares in "successful" IPOs, and 1050 shares in "unsuccessful" IPOs. The average IPO price is £15/share.* **b. What is your average investment in IPOs?** To calculate your average investment in IPOs, you can follow these steps: 1. Determine the total number of shares: \(50 \text{ (very successful)} + 400 \text{ (successful)} + 1050 \text{ (unsuccessful)} = 1500 \text{ shares}\) 2. Multiply the total number of shares by the average price per share: \(1500 \text{ shares} \times £15/\text{share} = £22,500\) So, your average investment in IPOs is £22,500. **c. What is your expected return and why is it lower than the average IPO underpricing?** To determine your expected return and understand why it might be lower than the average IPO underpricing, you need to consider the performance of each type of IPO (very successful, successful, and unsuccessful): 1. Evaluate the gains from each type of IPO: - Very successful IPOs often yield high returns. - Successful IPOs yield moderate returns. - Unsuccessful IPOs yield little to no returns or even losses. 2. Calculate the expected return: This requires taking the weighted average of the returns based on the number of shares you have in each category. Your overall expected return will depend on the proportion of shares in each category and their respective performances. Because you have a much larger number of shares in unsuccessful IPOs (1050 shares) compared to the very successful (50 shares) and successful IPOs (400 shares), your overall return would be influenced heavily by the poor performance of the unsuccessful IPOs. This results in a lower expected return compared to the average IPO underpricing, which does not take into account the distribution of shares among different performance categories. --- This detailed explanation helps in understanding the average investment in IPOs and provides insights into why the expected return might be lower due to the distribution of shares across different performance levels of IPOs.
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