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

A risk analyst evaluating a behavioral scorecard finds the Kolmogorov-Smirnov (KS) statistic is 45%. Which interpretation is correct?

A KS of 45% means the largest difference between the cumulative score distributions of good and bad accounts is 45 percentage points. It measures the scorecard's discriminatory power at its best separating score, and is not a default rate, AUC or misclassification rate.

  1. AThe maximum separation between the cumulative score distributions of goods and bads is 45 percentage pointsCorrect
  2. B45% of borrowers will default
  3. CThe area under the ROC curve is exactly 0.45
  4. DThe scorecard misclassifies 45% of accounts at every cutoff

Explanation

KS is the maximum vertical gap between the cumulative distributions of good and bad accounts across scores. A larger KS means better separation. It is not a default rate, an AUC value or a misclassification rate at all cutoffs.

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