Effective Strategies for Managing Market Risk

Michael is a portfolio manager responsible for managing a diversified equity portfolio valued at $10 million. The portfolio has been experiencing increased volatility due to shifts in macroeconomic factors such as interest rates and geopolitical tensions. Concerned about potential losses, Michael is assessing various strategies to mitigate market risk without overly sacrificing potential returns.

After evaluating different options, he considers:

1. Using options to hedge specific positions in the portfolio.

2. Increasing asset allocation to fixed income securities.

3. Implementing a stop-loss strategy for the portfolio.

Which of the following strategies is most effective in managing market risk associated with the entire equity portfolio while maintaining exposure to potential gains?