What is your average return as an investor

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Reference no: EM132023015

Thompson Brothers a large underwriter, is offering its customers the following opportunity: Thompson will guarantee a piece of every IPO it is invovled in. Suppose avaliable, you get them. If the deal is oversubscribed, your allocation of shares is rationed in proportion to the over subscription. Your market research shows that typically 80% of the time Thompson deals are oversubscribed 16 to 1. This excess demand would lead to a price increase on the first day of 20%. However 20% of the time Thompson deals are not oversubscribed, and while Thompson supports the price in the market on avaerge the price tends to decline by 5% on the first day. Based on these statistics what is the average underpricing of a Thompson IPO? What is your average return as an investor?

Reference no: EM132023015

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