Managing Market Risk with Macroeconomic Strategy

Emily is a portfolio manager at a large wealth management firm. She is currently reviewing a client's equity-heavy portfolio, which has performed well in the recent bullish market, but she is concerned about the potential impact of rising interest rates and geopolitical tensions on future returns. To manage market risk effectively, she considers three different strategies:

1. Diversifying the portfolio into alternative assets such as commodities and real estate.

2. Increasing the cash allocation to serve as a buffer against market fluctuations.

3. Implementing a macroeconomic overlay strategy to adjust exposure based on changing economic indicators.

Emily wants to identify which of these strategies would likely provide the best protection against market downturns caused by interest rate hikes and geopolitical risks.