Garcia Guitars and Weir Whiskey have announced IPOs at respective prices of $20 and $40. One’s stock price will decrease by $4 and the other’s will increase by $10 but you don’t know which is which. You plan on buying 8 shares of both. The under priced IPO will be ‘oversubscribed’ meaning your requested shares will be rationed and you’ll only get half of what you purchased but your other order will be fulfilled. There is a 50% chance each one will be oversubscribed.

What percent return would you expect to earn if there was no share rationing?

What percent return would you expect to earn given the share rationing?

Answer rating: 100% (QA)

Without share rationing there are four possible scenarios depending on which IPO increases and which one decreases Garcia Guitars increases by 10 Weir ... View the full answer