FRM Part II · FRM Exam Part II · Credit Scoring and Retail Credit Risk Management
A scorecard developer evaluates a bin of an applicant characteristic. The development sample has 8,000 goods and 2,000 bads. The bin contains 1,600 goods and 200 bads. Using WoE = ln(% goods in bin / % bads in bin), what is the WoE for this bin?
The bin holds 20% of goods (1,600 of 8,000) and 10% of bads (200 of 2,000). The ratio is 2, so the weight of evidence is ln(2), about 0.69. A positive value shows the bin is better than average in credit quality.
- A0.69Correct
- B-0.69
- C1.39
- D0.00
Explanation
% goods = 1,600/8,000 = 20%. % bads = 200/2,000 = 10%. Ratio = 2, ln(2) = 0.693. Inverting the ratio gives -0.69 (wrong sign). 1.39 is ln(4), from using bin odds 8:1 versus nothing, or squaring. 0.00 would require equal distributions.
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