Question 1

You have an arrangement with your broker to request 1,050 shares of all available IPOs. Suppose that 10% of the time, the IPO is "very successful" and appreciates by 119% on the first day, 80% of the time it is "successful" and appreciates by 13%, and 10% of the time it "fails" and falls by 16%. a. By what amount does the average IPO appreciate the first day; that is, what is the average IPO underpricing? b. Suppose you expect to receive 60 shares when the IPO is very successful, 250 shares when it is successful, and 1,050 shares when it fails. Assume the average IPO price is $19. What is your expected one-day return on your IPO investments? a. By what amount does the average IPO appreciate the first day; that is, what is the average IPO underpricing? The average IPO appreciation the first day is %. (Round to one decimal place.) b. Suppose you expect to receive 60 shares when the IPO is very successful, 250 shares when it is successful, and 1,050 shares when it fails. Assume the average IPO price is $19. What is your expected one-day return on your IPO investments? The expected one-day return on the IPO investments is \%. (Round to one decimal place.)