Response to the following problem:
IPO Underpricing Carlyle Ltd and Mullan Ltd have both announced IPOs at £40 per share. One of these is undervalued by £11, and the other is overvalued by £6, but you have no way of knowing which is which. You plan on buying 1,000 shares of each issue.
If an issue is underpriced, it will be rationed, and only half your order will be filled. If you could get 1,000 shares in Carlyle and 1,000 shares in Mullan, what would your profit be? What profit do you actually expect? What principle have you illustrated?