Vanderbilt Professors Create Method for Investing in Relative Stock Performance

This week the Nasdaq stock exchange has begun allowing investors to bet on a company’s performance relative to the broader stock market. The financial instrument was created from research by two Vanderbilt professors.

Jacob Sagi says the last few years of market volatility have shown that even high quality stocks can be swayed by crashes and swings.

“The market tanks. Apple goes down but not as much as the market does, so you were right to invest in Apple, but you still lost money.”

So Sagi and his fellow finance professor Robert Whaley have come up with a way to get a return on how Apple fares compared with the overall market. If a stock like Apple doesn’t fall as much as an index like the S&P 500, the investor makes money. The investor doesn’t gain anything if Apple just stays in lock step with other stocks. He loses if Apple, in this instance, doesn’t keep up with the broader market.

“If you want to put your faith in Ford and not in how the market toys with Ford, but just on Ford’s own ability to rise above the market, then you can do it with this.”

Options tied to the the so-called Alpha indexes starting this week. To commemorate the innovation, Vanderbilt’s Sagi and Whaley will ring the Nasdaq’s opening bell Tuesday.

Here’s a link to their research.

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