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 |
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
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