Final answer:
An investor can use options, particularly put options, as a form of insurance to protect against market downturns. Portfolio diversification is another key strategy to minimize risk. It's crucial to understand and manage the risks associated with different financial assets, often with the assistance of financial institutions or brokerages.
Step-by-step explanation:
An investor can use options to protect a portfolio against market risk in a strategy known as hedging. Put options can be useful as they grant the investor the right to sell the underlying asset at a predetermined price within a specific timeframe. This can be considered as an insurance policy against market downturns. For example, if an investor owns shares that she believes might lose value, purchasing a put option at the current price level safeguards against potential losses beyond the strike price of the option.
Another method to manage risk is through portfolio diversification. By investing in various financial assets with different risk levels, the investor can spread out the potential impact of any one investment's poor performance. When considering investments, it is essential to analyze the risks involved, such as currency risk, market risk, and credit risk, which vary between different types of financial assets like stocks, bonds, and options.
Financial institutions or brokerages facilitate hedging and other investment strategies, often for a fee. These entities provide necessary financial services that enable investors to navigate the complex financial market effectively. It's crucial for investors to understand how much they can afford to risk, and they should base their investment decisions on their personal risk tolerance in conjunction with the tradeoff between risk and return.