You have an arrangement with your broker to request 1000 shares of all available IPOs. Suppose that 10% of the time, the IPO is "very successful" and appreciates by 100% on the first day, 80% of the time it is "successful" and appreciates by 10%, and 10% of the time it "fails" and falls by 15%. Suppose you expect to receive 50 shares when the IPO is very successful, 200 shares when it is successful, and 1000 shares when it fails. Assume the average IPO price is $20.

1.Calculate the average IPO underpricing.

2.Given the magnitude of underpricing in part (a), discuss if it is a good idea to invest in the IPO market. When applicable, use the numbers in the question to justify your answer.

3.Research has shown that the average first day return of IPOs is positive, while that of SEOs is negative. What's the possible explanations for this empirical pattern, given that both are the issuance of equity capital?