Risk aversion refers to the tendency of traders to avoid high-risk situations and prefer safer, more stable investments. When markets are uncertain or volatile, traders with a high degree of risk aversion may pull back from riskier assets and turn to safer options.
In periods of risk aversion, traders may be more focused on protecting their capital than chasing high returns. This often leads to a decrease in demand for assets perceived as risky, which can drive down their prices. On the other hand, safe-haven assets like the US dollar, Japanese yen, or Swiss franc may see increased demand as traders seek stability.
Risk aversion is influenced by factors such as global economic conditions, political instability, or financial crises. During times of uncertainty, fear of losing money outweighs the potential for higher rewards, causing investors to adjust their portfolios to minimize exposure to risk.
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