The Watson Co. and the McIlroy Co. have both announced IPOs at $40 per share. One of these is undervalued by $8, and the other is overvalued by $4.75, 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. (Enter your answer as directed, but do not round intermediate calculations.)
Requirement 1:
Assuming you could get 1,000 shares in Watson and 1,000 shares in McIlroy, what would your profit be?
Profit $
Requirement 2:
What profit do you actually expect?
Expected profit $
Requirement 3:
What principle have you illustrated?