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FRM Part II · FRM Exam Part II · Credit Risk

A bank validates a rating model with a cumulative accuracy profile. The model's accuracy ratio is 0.60. The ratio is defined as the area between the model's CAP curve and the random model line, divided by the area between the perfect model's CAP curve and the random line. Which interpretation is correct?

An accuracy ratio of 0.60 means the model delivers 60% of the improvement over random ranking that a perfect model would deliver. It is a relative measure of discriminatory power from the CAP curve, not a percentage of borrowers correctly classified or a default probability.

  1. AThe model captures 60% of the maximum possible improvement over random rankingCorrect
  2. BThe model correctly classifies 60% of all borrowers
  3. CThe model has a 60% probability of default for the portfolio
  4. DThe model is wrong 40% of the time on defaulters

Explanation

The accuracy ratio is the model's gain over a random model as a fraction of the gain achievable by a perfect model. So 0.60 means 60% of the maximum possible improvement. It is not a classification rate or a default probability.

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