Question

Given below are two statements : one is labelled as Assertion (A) and the other is labelled as Reason (R).
Assertion (A) : The price of a stock is determined on the basis of the demand and supply of the stock.
Reason (R) : The value of sensex increases wherever there is a heavy demand for the stocks which form the sensex.
In the light of the above statements, choose the most appropriate answer from the options given below :

• A. Both (A) and (R) are correct and (R) is the correct explanation of (A)
• B. Both (A) and (R) are correct but (R) is not the correct explanation of (A)
• C. (A) is correct but (R) is not correct
• D. (A) is not correct but (R) is correct

Hint:

To check if the Reason is the correct explanation, read the Assertion, add "because", and then read the Reason.
"Stock prices are determined by demand and supply because the Sensex increases when there is demand for its stocks."
This is clearly not a logical explanation, confirming that (R) is not the explanation of (A).

Answer 1

The Correct Option is B

Step 1: Understanding the Question:
This question is in Assertion-Reason format and is based on financial market principles and stock indices.
It tests our understanding of how individual stock prices are determined in a market, how stock market indices (like the Sensex) are calculated, and how they relate to the underlying demand for their constituent stocks.

Step 2: Detailed Explanation:

• Analyze Assertion (A):
The price of any share or stock in a free market is determined by the forces of demand and supply.
When demand for a stock exceeds its supply, its price increases; conversely, when supply exceeds demand, its price decreases.
Therefore, Assertion (A) is correct.

• Analyze Reason (R):
The Sensex is a market-capitalization-weighted index composed of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE).
When there is heavy demand for these constituent stocks, their prices rise, which increases their market capitalization and directly causes the value of the Sensex to rise.
Therefore, Reason (R) is correct.

• Verify if R is the Correct Explanation of A:
While both statements are correct, Reason (R) is a specific application of market forces to a index (Sensex).
It does not explain the general market principle of *why* individual stock prices are determined by demand and supply (which is based on utility, market liquidity, and investor expectations).
Therefore, (R) is not the correct explanation of (A).

Step 3: Final Answer:
Both (A) and (R) are correct, but (R) is not the correct explanation of (A).
Thus, the correct option is (B).