Managing Market Risk with Protective Puts

Medium Risk Management Applications Managing Market Risk

ABC Investments is considering a strategic shift in its portfolio to manage market risk more effectively. The firm currently holds a diversified equity portfolio but is concerned about potential volatility in the market. The portfolio manager is exploring the use of options as a means to hedge against unexpected market movements. Which of the following strategies would BEST mitigate downside risk while allowing for potential upside appreciation?

Implementing a protective put strategy by purchasing put options on individual stocks.

Selling call options against the portfolio to generate income.

Allocating additional funds to high-yield bonds to reduce equity exposure.

Hint

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