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Suppose that the price of IPO shares is likely to increase (decrease) by 10% with a 70% (30%) chance on the first day of trading.
Suppose that the price of IPO shares is likely to increase (decrease) by 10% with a 70% (30%) chance on the first day of trading. Assume also that informed investors know which IPOs are underpriced so that they oversubscribe to those IPOs. As a result, an uninformed investor will receive only 50% of their subscription in underpriced IPOs while receiving the full 100% of their subscription in overpriced IPOs. What would be the expected rate of first-day return for an uninformed investor?
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