Managing Market Risk in Portfolio Management

A successful wealth management firm is reviewing its investment strategy in light of increasing market volatility and economic uncertainty. The firm currently maintains a diversified portfolio but is concerned that market risk may undermine its long-term investment objectives. The portfolio manager is tasked with revisiting the risk management framework to better navigate adverse market conditions. Specifically, the manager must consider the implications of various market risk hedging strategies, including the use of derivatives, asset allocation adjustments, and alternative investments.

Using your knowledge of risk management, critically evaluate the options available to the portfolio manager for managing market risk. Discuss the advantages and disadvantages of at least two risk management strategies and their potential effectiveness in preserving portfolio value during periods of market turbulence. Provide examples of financial instruments or methods that can be utilized within each strategy and analyze how these may impact the overall risk-adjusted return of the portfolio.