Effective Strategies for Managing Market Risk

As a portfolio manager, you are assessing the market risk exposure of a diversified equity portfolio. The portfolio comprises multiple sectors, with varying betas reflecting their sensitivity to market movements. You observe that the market is highly volatile due to recent geopolitical tensions, prompting you to evaluate your options for managing this increased market risk. You are considering three potential strategies: selling shares of high-beta stocks to reduce overall portfolio beta, employing derivatives to hedge against market downturns, and reallocating capital to low-volatility assets.

Which of the following strategies is most effective in managing the portfolio's market risk in this scenario?