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FRM Part II · FRM Exam Part II · Credit Scoring and Rating

A bank validates a new application scorecard on a holdout sample. At a given cutoff, the cumulative share of defaulters scoring below the cutoff is 80% and the cumulative share of non-defaulters scoring below the cutoff is 35%. What is the Kolmogorov-Smirnov value at this cutoff?

The KS value is 45%, found by subtracting the cumulative proportion of non-defaulters below the cutoff (35%) from the cumulative proportion of defaulters below it (80%). KS measures the maximum separation between the two cumulative distributions, so a larger gap indicates better discrimination.

  1. A45%Correct
  2. B115%
  3. C2.29 times
  4. D55%

Explanation

KS at a cutoff is the difference between the cumulative distributions of bads and goods: 80% - 35% = 45%. Adding them gives 115%, which is meaningless. The ratio 80/35 = 2.29 is a lift-type measure, not KS. 55% would result from mistakenly using 100% - 45%.

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