Question

Two statements are given below. Statement I: A company announced record quarterly profits today. Statement II: The company's share price rose significantly on the stock exchange today. Which of the following best describes the relationship between the two statements?

• A. Statement I is the cause and Statement II is its effect.
• B. Statement II is the cause and Statement I is its effect.
• C. Both statements are independent of each other.
• D. Both statements are effects of a common cause.

Hint:

Consider which of the two events is a real underlying business result and which is a market reaction that depends on it.

Answer 1

The Correct Option is A

Step 1: Test the direction of causation both ways. First ask: could Statement II (the share price rising) have caused Statement I (the company announcing record profits)?
Step 2: That direction is impossible - a company's actual quarterly profit is a real business outcome determined by its operations, not something created after the fact by movements in its stock price.
Step 3: Now ask: could Statement I have caused Statement II? Announcing record profits boosts investor confidence, which increases demand for the shares and drives the price up - a well-established market mechanism, and the announcement is the triggering news event of the day.
Step 4: Since only one direction of causation is logically possible, that is the correct relationship.
Correct option: (1) Statement I is the cause and Statement II is its effect.