IPO Underpricing.
Response to the following problem:
James Ltd and Lars Ltd have both announced IPOs at $40 per share. One of these is undervalued by $7, and the other is overvalued by $3.50, but you have no way of knowing which is which. You plan to buy 1000 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 1000 shares in James and 1000 shares in Lars, what would your profit be?
What profit do you actually expect? What principle have you illustrated?