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

A bank's validation team assesses the quality of an agency's rating system by constructing a cumulative accuracy profile (CAP) and its accuracy ratio. If the rating system has no discriminatory power at all, which result should be observed?

A rating system with no discriminatory power produces a CAP curve lying on the diagonal, the same as random selection, so the accuracy ratio is zero. A perfect system would score one, and values between zero and one indicate increasing ability to separate defaulters from non-defaulters.

  1. AAn accuracy ratio of 1
  2. BAn accuracy ratio of 0, with the CAP curve lying on the diagonalCorrect
  3. CAn accuracy ratio of -1
  4. DAn accuracy ratio of 0.5, with the CAP curve lying above the diagonal

Explanation

A random model's CAP curve lies on the 45-degree line, so the area between it and the random curve is zero, giving an accuracy ratio of 0. A perfect model has an accuracy ratio of 1, and a ratio of 0.5 would indicate partial discriminatory power.

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