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a) Assume that initial public offerings (IPOs) on average are not under-priced. Pricing the IPO too high and too low are equally likely. Assume that
a) Assume that initial public offerings (IPOs) on average are not under-priced. Pricing the IPO too high and too low are equally likely. Assume that there are two IPOs only - Share A and Share B. Share A's first day return after IPO is 20%. Share B's first day return after IPO is -20%. The IPO price of both shares is $20/share. Share A is a hot IPO deal and "smart money" is actively participating. As a result, the IPO of share A is 2 times over-subscribed and all applications are rationed equally. Times oversubscribed equal to the total demand at the IPO price divided by the issue size. Share B is not over- subscribed and all applications get 100% allocation. As a retail investor, you bid for 2,000 shares in both IPOs. What is your profit from participating in both IPOs (ignore transaction costs)
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