UPSC CSE Prelims
Stock Market Previous Year Questions (PYQs)
Practice solved questions for Stock Market with detailed step-by-step solutions, key insights, and trend analysis for UPSC CSE PRELIMS.
Solved Previous Year Questions
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Consider the following statements:
I. India accounts for a very large portion of all equity option contracts traded globally thus exhibiting a great boom.
II. India’s stock market has grown rapidly in the recent past even overtaking Hong Kong’s at some point of time.
III. There is no regulatory body either to warn the small investors about the risks of options trading or to act on unregistered financial advisors in this regard.
Which of the statements given above are correct?
Detailed Explanation:
Correct Answer: ✅ Option 1 (I and II only)
India has witnessed a remarkable surge in stock market participation and derivatives trading in recent years. At the same time, investor protection and market regulation are actively handled by Securities and Exchange Board of India.
✅ Statement I is Correct: India accounts for a very large share of global equity options trading volume, making it one of the world's most active derivatives markets.
✅ Statement II is Correct: India's stock market capitalization grew rapidly and, during 2024, briefly surpassed that of Hong Kong, becoming one of the world's largest stock markets.
❌ Statement III is Incorrect: India has a dedicated regulator, Securities and Exchange Board of India>, which:
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Warns investors about the risks of derivatives and options trading.
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Regulates investment advisers and research analysts.
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Takes action against unregistered financial advisors and fraudulent entities.
Short Notes: India's Equity Options Market
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India is among the world's largest markets for equity derivatives trading.
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Equity options provide the right, but not the obligation, to buy or sell an asset.
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High trading volumes do not necessarily indicate high profitability for retail investors.
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SEBI regulates stock exchanges, brokers, and investment advisers.
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The National Stock Exchange and Bombay Stock Exchange are India's major stock exchanges.
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India became one of the world's top stock markets by market capitalization in recent years.
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SEBI frequently issues advisories regarding the risks of speculative options trading.
In the context of finance, the term 'beta' refers to the
Detailed Explanation:
Answer: Option 4 — a numeric value that measures the fluctuations of a stock to changes in the overall stock market
In finance, Beta (β) is a measure of the volatility or systematic risk of a security or portfolio in comparison to the market as a whole. It is a key component of the Capital Asset Pricing Model (CAPM) and quantifies how much a stock's price is expected to move relative to market movements.
Analysis of Options:
❌ Option 1 – Incorrect: This describes arbitrage, which involves simultaneous buying and selling of assets across different platforms to profit from price differences.
❌ Option 2 – Incorrect: This refers to portfolio management strategy or asset allocation rather than the specific concept of beta.
❌ Option 3 – Incorrect: This describes basis risk, which occurs when a hedge does not move in perfect correlation with the underlying asset.
✅ Option 4 – Correct: Beta is indeed a numeric value measuring a stock's volatility relative to overall market changes.
📝 Short Notes: Beta in Finance
| Beta Value | Interpretation | Risk Profile |
|---|---|---|
| β = 1 | Stock moves in line with the market | Average market risk |
| β > 1 | Stock is more volatile than the market (e.g., β = 1.5 means 50% more volatile) | Higher risk, higher potential return |
| β < 1 | Stock is less volatile than the market | Defensive stocks, lower risk |
| β = 0 | No correlation with market movements | Risk-free assets (e.g., government bonds) |
| β < 0 | Inverse relationship with market (rare) | Moves opposite to market |
- Use in CAPM: Expected Return = Risk-free Rate + Beta × (Market Return - Risk-free Rate)
- Systematic Risk: Beta measures only systematic (market) risk, not unsystematic (company-specific) risk
- Portfolio Beta: Weighted average of individual stock betas in the portfolio
- Limitation: Beta is based on historical data and may not predict future volatility accurately
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