FRM Part I · FRM Exam Part I · Machine-Learning Methods
A logistic regression model of default has a coefficient of 0.693 on leverage (debt-to-equity). Holding other variables constant, what is the approximate effect of a one-unit increase in leverage on the odds of default?
Odds of default are multiplied by about 2. A logistic coefficient measures the change in log-odds per unit of the variable, so the odds ratio is e^0.693 ≈ 2. The effect on probability itself is nonlinear and depends on the starting level.
- AOdds increase by 0.693 percentage points
- BProbability of default increases by 69.3%
- COdds of default are multiplied by about 2Correct
- DOdds of default are multiplied by about 0.5
Explanation
In logistic regression a coefficient is the change in log-odds per unit. Odds are multiplied by e^0.693 ≈ 2. The probability change is not constant, so the probability does not rise by 69.3%.
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