4) Suppose there are two future IPOs: Cannoli (C) and Pasta (P). Each of the IPOs has an offering price of $20. Canoli has a true value of $29 and Pasta has a true value of $15. You can assume that the market price will reflect the true value on the first day of trading.

Suppose there are three risk neutral investors: Alex, Jessica and Jasper. Suppose that Jasper is informed. In other words, Jasper knows the true values of the IPO shares. Alex and Jessica are not informed; they only know the offering prices of the IPOs. Assume that all three investors place bids for at least one of the two IPOs. Assume that there are three shares in each IPO, and the three shares will be allocated across the three investors. Assume also that if there are more shares to be allocated than bids, investors who bid for one share may receive two shares. Assume that any investor who places a bid for any positive number of shares will receive at least one share.

a) (2 pts) What bid is each investor likely to place and what are the likely allocations? Please provide your answer to (a) in terms of number of shares.

b) (2 pts) Using your answer above, after the market opens, what is the return on each investors portfolio?

c) (3 pts) What is the winners curse, and how does it fit this situation?

d) (3 pts) How can the underwriter make sure the uninformed investors are willing to participate in future IPOs?