Which of the following best describes a bear market?

A bear market is characterized by a significant decline in asset prices, typically defined as a drop of 20% or more from recent highs, accompanied by widespread pessimism among investors. This environment leads to a negative sentiment surrounding the market, as traders and investors fear further losses and may choose to sell rather than buy.

Understanding the emotional and psychological aspects is crucial, as it illustrates how investor sentiment can create a self-reinforcing cycle of selling, further driving prices down. In a bear market, the atmosphere is often marked by anxiety, skepticism, and caution, as individuals become increasingly concerned about the economic outlook and the potential for further declines.

In contrast, other scenarios like rising asset prices paired with optimism or stable prices with neutral sentiment do not fit the bear market definition, as they indicate either a bullish or stable market condition rather than a declining one. High volatility also does not inherently define a bear market, since volatility can occur in various market conditions without the overarching trend of declining prices. Thus, the essential features of a bear market are captured accurately in the description of declining asset prices and the prevailing pessimism among investors.