Which scenario fits the situation where risk-averse investors prefer bonds over stocks?

Risk-averse investors are typically individuals who prefer to avoid uncertainty and prioritize the preservation of capital over the potential for higher returns. In the context of the stock market, this means that when the market is experiencing high volatility—characterized by significant price fluctuations and uncertainty regarding future performance—these investors are more likely to favor bonds over stocks.

Bonds are generally considered safer investments, as they provide fixed income and are less susceptible to the dramatic price swings associated with stocks during tumultuous market conditions. When volatility is high, the risk of substantial losses in the stock market increases, making the more stable and predictable returns from bonds particularly appealing to risk-averse investors.

In contrast, during economic booms, financial stability, or when stock prices are expected to rise, the temptation for investors, including those who are risk-averse, to consider stocks may increase. However, these scenarios do not create the same level of urgency for risk-averse investors to prefer bonds, as they usually represent less uncertainty and lower risk during periods of calm and growth. Thus, high market volatility is distinctly the scenario that aligns with the preference for bonds among risk-averse investors.