Question

______     6.      In class, we discussed the “winner’s curse” as it relates to purchases of stock in an IPO by small “retail” investors. Assume you are one of these small retail investors and you place orders to purchase 1,000 shares of stock in two different IPOs. According to the winner’s curse, on which of these two IPO purchases would you expect to earn the highest rate of return?

A. An IPO in which you receive full allocation on your order (i.e., you are able to purchase the entire 1,000 shares at the IPO offer price).

B. An IPO in which you receive only partial allocation on your order (e.g., you are only able to purchase 200 shares at the IPO offer price).

______     7.      Assume that a firm is using the uniform-price auction method for its IPO in which it plans to issue 1500 shares. Using the information below, and following the method discussed in class, what will the offer price be for the IPO?

Bidder	Price	Shares
1	$20	200
2	$19	600
3	$18	1000
4	$17	300
5	$16	500
6	$15	800
7	$14	300

Answer 1

6. Typically, if an IPO retail investor gets all the shares he has applied for, then probably it indicates that the issue is not subscribed very much. Since the issue is not subscribed in great demand, the initial returns on the day of the IPO launch may give poor returns

So option b , where the retail investor gets only a portion of his applied shares stands a better chance at superior returns. Answer is option b

7) To find the weighted average of the potential IPO price, we need to consider the price of the bids till the time we reach 1500 shares which is also the total issue size.

Bidder	Price	Shares
1	$20	200
2	$19	600
3	$18	700 (so that total is 1500 shares 200+600+700)

weighted avg. price is (($20*200)+($19*600)+($18*700))/1500=$18.67 (IPO price)