Managing Market Risk in a Diversified Portfolio

Very Hard Risk Management Applications Managing Market Risk

Consider a portfolio manager overseeing a diversified multi-asset portfolio consisting of equity, debt, and alternative investments. In the current market environment, the manager is concerned about downside risks due to potential interest rate hikes and geopolitical uncertainties. To mitigate market risk, the manager has the option to implement different risk management strategies.

Which of the following strategies would most effectively reduce the portfolio's sensitivity to market risk while maintaining a balance of asset classes?

Increase the allocation to high-quality corporate bonds and reduce exposure to equities.

Use options strategies such as protective puts on the equity portion of the portfolio.

Diversify the equity investments by increasing holdings in emerging markets.

Hint

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