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In 2018 a lecturer of finance purchased 11 IPOs of stocks
In 2018 a lecturer of finance purchased 11 IPOs of stocks. He sold each of them after keeping them for a month. He tried to apply for all the 20 IPOs in Tech sector. Out of 20, 9 did not allocate any shares. Out of the 11 purchased, 4 offerings issued less than the requested shares. The year 2018 was bullish for Tech stocks. The stocks of the 20 companies which went public saw a 70% rise in their initial share price. When the lecturer checked his account, he found that his total return was only 17%. Please explain whether he was unlucky or should you have expected him to do worse than an average IPO investor.
Expert Solution
The reason is that the 9 stocks he has not been allocated and the stock has not be located are the having most probabilities that they are overvalued than these stocks that he has been allotted because the stock which are in scarcity having higher value or a having higher chance of to get a profitable.
The stocks are profitable why because they are having higher demand stocks those are having higher demand have a less probability to get allocated. The 20% return is average return on those 20 stocks, from those 20 stocks we have not been alloted high profitable stocks that's why our averages return is less than the average return on those 29 stocks.
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