Managing Market Risk for High-Net-Worth Clients

As a lead portfolio manager at an investment firm, you are tasked with revising your firm's approach to managing market risk in light of recent macroeconomic challenges, including rising interest rates and geopolitical uncertainties. Your firm’s client base consists of high-net-worth individuals who have varying degrees of risk tolerance and investment horizons.

Your duty is to assess the current market risk management strategies employed by your firm, and propose a comprehensive framework that balances risk and return effectively. In your response, include a discussion on the use of derivatives for hedging, the importance of portfolio diversification, and the relevance of stress testing and scenario analysis in your firm's risk management process. Additionally, explain how behavioral finance concepts might influence your clients' perceptions of risk and how you would address these biases in your communication.