This year increases the necessity of market participants to hedge their portfolios.

In 2011, the markets were described by many investors as “risk on, and risk off”—a condition that’ll continue to be prescribed for 2012. A “risk on, risk off” trading environment coupled with volatility in the year to come may boost the presence of hedged bets in investors’ portfolios.

“You have to hedge your downside risk, and trading options or annuities is a good way to do that,” said Quincy Krosby, chief market strategies at Prudential Annuities.

“In 2012, you’re in a world of risky business, you’ll be punished if you’re not in the equity markets when it celebrates and you want a firm footing when fixed income bounces back,” she said.

Like other optimists, Krosby accepts that the ongoing volatility merely represents the “new normal” for the markets and shouldn’t shake investor confidence as long as trades are appropriately protected…because the markets haven’t shaken their resolve.

“Coming from a trading background, I can say that traders get bored with the same stories; you can only discount the same news once or twice before the markets need something else to make noise to get their attention,” Krosby continued. “The markets start to accept what is being offered and need to go in another direction.”

One example of Krobsy’s assertion is the ongoing European sovereign debt crisis; she references plenty of positive trading days meanwhile the economic news out of the region continued to be bleak.

Despite foreboding macroeconomic news, the markets will continue to eek out modest, yet expansionary, growth; the firm unanimously noted in a press briefing.

While the firm’s Managing Director of international investments, John Praveen called 2011’s cross-pollination of the markets and monetary policy “political dysfunction,” Krosby acknowledges that the markets often witness politics trumping economics.

This year, the markets may re-examine some politically charged decisions of the past, according to Krosby.

“Politics trumped economics when it came to creating a united Eurozone. Don’t think for a second that the European Union members will not consider status changes regarding the periphery member countries,” she said, though unable to go into more detail.