Managing Market Risk in a Volatile Environment

As a portfolio manager for a high-net-worth individual, you are tasked with reassessing the client's investment strategy in light of rising market volatility. The client is concerned about potential losses due to market downturns and is seeking ways to manage market risk effectively. Their current portfolio is composed of 60% equities, 30% fixed income, and 10% alternative investments. You have the following market conditions to consider:

• Equity markets are experiencing increased volatility, with a beta coefficient of 1.2 for the client's equity holdings.
• The fixed income market is expected to face upward pressure on yields, leading to potential capital losses.
• The client has a risk tolerance of 60, on a scale of 1 to 100, where 100 indicates a high risk tolerance.

Your response should address how you would adjust the client's portfolio to manage market risk. Specifically, discuss strategies such as asset allocation adjustments, the use of derivatives, and sector rotation. Additionally, consider the trade-offs associated with these strategies and how they align with the client's risk tolerance. Provide a rationale for your recommendations and how they would mitigate potential downside risk.