ABC Asset Management is evaluating its internationally diversified portfolio that primarily consists of equities and bonds from various markets. Following recent geopolitical developments and shifts in monetary policy across Europe and North America, the firm is concerned about the increased volatility and potential adverse effects on portfolio returns. The chief risk officer (CRO) suggested implementing value-at-risk (VaR) measures to quantify potential losses.

During a strategic meeting, the CRO presented three options to manage the portfolio's market risk more effectively: hedging strategies, reallocation to less correlated assets, and dynamic asset allocation based on market conditions. Each option was assessed in terms of expected impact on risk and returns.

Which of the following options is most likely to effectively reduce the portfolio’s market risk without significantly sacrificing its expected return?