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

A bank's application scorecard was built only on accepted applicants, whose outcomes were observed. Management worries the model may perform poorly on the full through-the-door population. Which technique is designed to address this problem?

Reject inference is the technique used. Because a scorecard built only on accepted applicants suffers from sample selection bias, reject inference estimates likely good or bad outcomes for rejected applicants so the model better represents the entire through-the-door population.

  1. AReject inferenceCorrect
  2. BWinsorization of the target variable
  3. CStress testing of the cutoff
  4. DPrincipal component rotation

Explanation

Sample selection bias arises because rejected applicants have no observed performance. Reject inference assigns inferred good/bad outcomes to rejects (for example by augmentation or parceling) so the model reflects the full applicant population. The other choices do not address missing outcomes for rejects.

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