Dream Prize Reward: Discard immediately and draw Adventure Cards until a Magic Object is revealed. You may take the Magic Object, then discard the other Cards. If you choose not to take the Magic Object (or cannot), you recieve no reward.

Question: If I cannot have a Magic Object (due to my alignment; or I already have 4 objects), does the Magic Object stay on my space or is it discarded?

In the last game I played a similar situation occured - a evil character drew an magic object only a good character could use. The character simple left the object on the space.

I think that if you cannot keep the reward, then it must be discarded

If you ditch it on the space, then characters can still get the reward, and the warlock quest reward card says that you receive no reward!