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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. The Kolmogorov-Smirnov (KS) statistic is 0.45 at a score cutoff of 620. Which interpretation is correct?

The KS statistic measures the maximum separation between the cumulative score distributions of good and bad borrowers. A value of 0.45 at a 620 cutoff means the largest gap between the two distributions is 0.45 there. It is not an error rate or an AUC.

  1. A45% of all applicants scoring below 620 will default
  2. BThe maximum difference between the cumulative distributions of goods and bads is 0.45, occurring near a score of 620Correct
  3. CThe scorecard misclassifies 45% of applicants at a cutoff of 620
  4. DThe area under the ROC curve equals 0.45

Explanation

KS is the maximum vertical gap between the cumulative score distributions of good and bad accounts. Here that gap is 0.45, located at about 620. It is not a misclassification rate or default rate, and it is not the AUC.

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