FRM Part II · FRM Exam Part II · Credit Scoring and Retail Credit Risk Management
A lender's scorecard uses points-to-double-the-odds (PDO) scaling: a score of 600 corresponds to good:bad odds of 30:1, and PDO is 40. Which score corresponds to odds of 120:1?
The score is 680. Moving from odds of 30:1 to 120:1 requires two doublings of the odds, and each doubling adds 40 points, so the score increases by 80 from 600. A single doubling would give 640, which is wrong.
- A680Correct
- B640
- C720
- D660
Explanation
Odds rise from 30:1 to 120:1, a factor of 4, which is two doublings (30→60→120). Each doubling adds 40 points, so the score is 600 + 80 = 680. Choosing 640 counts only one doubling; 720 counts three; 660 uses a linear misreading of the odds ratio.
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