Effective Credit Risk Reduction Strategy

A large investment firm, Alpha Asset Management, has a diversified portfolio that includes corporate bonds from various sectors. Recently, they have identified a rising risk of default in the retail sector, particularly due to economic headwinds and changing consumer preferences. To manage this credit risk effectively, the risk management team is considering multiple strategies.

One strategy is to adjust the portfolio's bond ratings by selling off lower-rated retail bonds while simultaneously increasing holdings in bonds with higher credit ratings from more stable sectors such as utilities and healthcare. Another strategy is to implement a credit default swap (CDS) on the portfolio's retail bond exposure, transferring some credit risk to a counterparty. The team is also contemplating increasing their cash reserves as a buffer against potential liquidity impacts if defaults occur.

Which of the following strategies would most effectively reduce the credit risk exposure related to the retail sector without compromising overall portfolio liquidity?