A large all-equity pension fund company with AUM of $500 Billion that is 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 regard to such charges. It turns out that the CRO of the fund is an old buddy of yours from school times and regards you as a worldclass expert. With no hesitation she then turns to you for help. Given your close friendship (and a hefty paycheck she offers) you eagerly decide to provide feedback.
In your recommendation, you may want to consider the following:
- Access to daily price data of the S&P 500 index (attached data_exam.xlsx)
- 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 the portfolio strategy
- Supporting your answers with graphs / tables