Managing Credit Risk in Bond Investments

John is a portfolio manager at a mid-sized investment firm that specializes in corporate bonds. Recently, the firm has been facing concerns regarding credit risk associated with its bond holdings. To address this issue, John has been evaluating the effectiveness of several strategies to manage the potential default risk of their investments.

In light of these discussions, consider the following strategies he is considering:

• Increased diversification across different sectors and geographies.
• Implementing a more intensive credit analysis process before investment.
• Utilizing credit derivatives to hedge against default risk.

Which of the following strategies is most likely to directly reduce the impact of credit risk from a specific bond default?