Question

The Woods Co. and the McIlroy Co. have both announced IPOs at $56 per share. One of these is undervalued by $17.00, and the other is overvalued by $8.25, but you have no way of knowing which is which. You plan on buying 1,800 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled.

Assuming you could get 1,800 shares in Woods and 1,800 shares in McIlroy, what would your profit be? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Profit            $

What profit do you actually expect?  (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Expected profit            $

What principle have you illustrated?

	Prisoner's dilemma
	Break-even
	Winner's curse

Answer 1

The profit will be made on half the shares and loss on all

Hence, profit = 17*1,800/2 – 8.25*1,800

= $450

Expected Profit = 17*1,800 – 8.25*1,800

= $15,750

The principle illustrated is Winner’s Curse

In which winner overpays due of incomplete information