A large all equity pension fund company with AUM of $500 Billion that closely following S&P 500 index is facing a possibility of new regulatory changes in its management of market risk. The new regulation would require capital charges to cover possible tail event losses based on the realistic assessment of market risk of the company. A CRO (Chief Risk Officer) of the fund is given a task to assess a range of possible costs with regards to such charges. The CRO turns to you for your recommendations. In your recommendations, you need to consider the following:
- access the daily price data online for the S&P 500 index (from Jan 1, 2005 to Dec 31, 2014)
- various choices of risk measures
- specificity of the data in terms of its distribution and volatility structure
- tradeoffs between profitability and risk of the implemented charges
- possible adjustments in portfolio strategy
- supporting your answers with graphs / tables