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

A risk manager reviews a behavioral scorecard and finds a Kolmogorov-Smirnov (KS) statistic of 0.45 at validation. The statistic is measured as the maximum separation between two cumulative distributions across score values. Which interpretation is most accurate?

A KS of 0.45 means the largest gap between the cumulative score distributions of good and bad accounts is 45 percentage points. It measures discrimination or rank-ordering, not calibration of predicted default rates, and it is not equal to the Gini coefficient.

  1. AThe maximum gap between the cumulative score distributions of good and bad accounts is 45 percentage points, indicating discriminatory powerCorrect
  2. B45% of the bad accounts were correctly predicted to default at the chosen cutoff
  3. CThe scorecard's predicted default rates match observed default rates within 45%
  4. DThe model's Gini coefficient must equal exactly 0.45

Explanation

KS measures the maximum vertical distance between the cumulative distributions of goods and bads, so 0.45 means a 45 percentage point gap, which is a measure of rank-ordering power. It is not a hit rate and says nothing about calibration. It is also not mathematically identical to the Gini coefficient.

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