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

A bank validates its retail scorecard by plotting the cumulative proportion of defaulters captured against the cumulative proportion of all borrowers, ranked from riskiest to safest score. The resulting Cumulative Accuracy Profile (CAP) curve lies very close to the 45-degree diagonal. What does this indicate about the model?

A CAP curve hugging the diagonal means the model ranks borrowers no better than random selection, so it has almost no discriminatory power. A strong model would capture most defaulters within the riskiest-scored fraction of borrowers and bow well above the diagonal.

  1. AThe model has almost no discriminatory powerCorrect
  2. BThe model is perfectly calibrated to observed default rates
  3. CThe model has near-perfect discriminatory power
  4. DThe model is overfitted to the development sample

Explanation

A CAP curve on the diagonal is what a random model produces, because selecting x% of borrowers captures only x% of defaulters. A perfect model's curve rises steeply and then flattens. Calibration is a separate property and cannot be read from closeness to the diagonal.

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