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FRM Part II · FRM Exam Part II · Credit Risk

A bank's rating model is tested on 1,000 borrowers, of which 50 defaulted. Using the cumulative accuracy profile, the area under the model's CAP curve gives an accuracy ratio of 0.60. Which interpretation is correct?

An accuracy ratio of 0.60 means the model achieves 60% of the discriminatory improvement over a random model that a perfect model would achieve. It is not a classification hit rate, and the corresponding ROC AUC would be 0.80, not 0.60.

  1. AThe model captures 60% of the improvement over a random model relative to the perfect modelCorrect
  2. BThe model correctly classifies 60% of all borrowers
  3. CThe model's AUC of the ROC curve is 0.60
  4. D60% of defaulters are in the worst-rated grade

Explanation

The accuracy ratio is the area between the model CAP and the random CAP divided by the area between the perfect CAP and the random CAP. So 0.60 means the model delivers 60% of the possible gain over random. AUC would be (1+AR)/2 = 0.80, so the AUC option is wrong.

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