In the context of investments, if a stock has a negative alpha, what should an investor generally do?

• A. Ignore the alpha value, as it is not relevant to investment decisions.
• B. Hold the stock indefinitely, since negative alpha means it is less risky.
• C. Consider selling the stock, as it is underperforming relative to its expected return.
• D. Buy more of the stock, as a negative alpha indicates strong future performance.

Answer: (C)

Verified step by step guidance

1. Understand the concept of alpha in investments: Alpha measures the performance of an investment relative to a benchmark index, adjusted for risk. A positive alpha indicates outperformance, while a negative alpha indicates underperformance.
2. Analyze the meaning of a negative alpha: A negative alpha suggests that the stock is underperforming compared to its expected return based on its risk level.
3. Evaluate the implications for investment decisions: If a stock has a negative alpha, it may not be meeting the investor's expectations or the market's risk-adjusted return standards.
4. Consider the appropriate action: Based on the underperformance indicated by the negative alpha, an investor might consider selling the stock, especially if there are better-performing alternatives available.
5. Avoid common misconceptions: Do not ignore the alpha value, as it is a critical metric for assessing performance. Also, a negative alpha does not imply lower risk or strong future performance, so holding or buying more of the stock may not be advisable.