University of Central Florida (UCF) FIN2100 Personal Finance and Investments Final Practice Exam

A bear market is characterized by a prolonged decline in investment prices, typically a drop of 20% or more in major stock indices. During such a market condition, investor sentiment generally turns pessimistic, leading to a decreased confidence in stock prices among investors.

The correct choice reflects that the potential for financial loss is heightened in bear markets, as the value of investment portfolios can decline significantly. This downturn can create challenges for investors, especially those who may need to liquidate their investments during this period of lower prices. As investors sell to cut their losses or rebalance their portfolios, the downward pressure on stock prices can exacerbate financial losses.

The other options present scenarios that are generally not true in a bear market. Increased value of stocks is counterintuitive, as stocks typically decrease in value during these times. Likewise, guaranteed returns on investments and less risk of investment are not characteristics of a bear market; in fact, they often lead to uncertainty and increased risk instead.