The IPO Portfolio: An Alternative Approach to Higher Returns?

Abstract

Investors in today's financial markets continue to look for ways to enhance portfolio returns. Unfortunately, investments that offer the potential for higher gains may also include increased volatility, which can diminish some investor's desirability to hold these types of securities. Many portfolio managers, seeking to increase the return on their portfolios, will selectively choose riskier securities and practice risk reduction through diversification. Initial public offerings (IPOs) may offer the investor an investment alternative to use in an effort to enhance portfolios returns. lPO research, however, shows IPO returns can be quite volatile. Combining IPOs into a single. separate portfolio may reduce overall risk, while minimizing the potential of jeopardizing the investor's total holdings. Several research questions arise. Could a portfolio of IPQ equity securities produce a rate of return comparable to a widely held index, such as the S&P 5OO? Specifically, can a diversificd portfolio of IPO stocks out-perform the S&P 500 over short-term and longer-term time periods? If so, how risky would such an IPO portfolio be, compared to the widely-followed S&P 500 index? Finally, would combining an IPO portfolio with the S&P 500 portfolio result in overall risk reduction? This research seeks answers to these questions.