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FRM Part II · FRM Exam Part II · Credit Scoring and Retail Credit Risk Management

A bank tests a scorecard for fairness. Group A has 1,000 applicants with 600 approved. Group B has 500 applicants with 200 approved. Using the four-fifths (80%) rule on approval rates, what is the adverse impact ratio and the conclusion?

The adverse impact ratio is 0.67, since Group B's 40% approval rate divided by Group A's 60% equals about 0.667. That is below the 0.80 threshold, so the result indicates potential adverse impact against Group B and warrants further review.

  1. A0.80, which meets the threshold exactly
  2. B0.67, which falls below 0.80 and indicates potential adverse impactCorrect
  3. C0.33, which falls below 0.80 and so indicates adverse impact
  4. D1.50, which exceeds 0.80 and indicates no concern

Explanation

Approval rate for A is 600/1,000 = 60%; for B is 200/500 = 40%. Ratio = 40/60 = 0.667, below 0.80, signaling potential adverse impact on B. Using the difference (0.33) or inverting the ratio (1.50) is wrong.

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