An initial public offering (IPO) is the first sale of stock by a private company
ID: 3350558 • Letter: A
Question
An initial public offering (IPO) is the first sale of stock by a private company to the public. In a study of more than 4000 IPOs, researchers found the average annual return over a five-year period for firms issuing an IPO was 5.1%. (source: Loughran, T., and J. R. Ritter. The New Issues Puzzle. Journal of Finance 50:23-51). If the distribution describing returns reported for all the various IPO firms in the study is normal, with a standard deviation of 2.2%, there is a .10 probability that one of the stocks had a five-year average annual return of less than ____%.
Explanation / Answer
mean==5.1
=2.2
z score for Prob =0.1 is -1.2815
x= +*z
= 5.1 +2.2(-1.2815)
=5.1 -2.8193
=2.2807 (or 2.28% rounded to two decimal places)