FRM Part II · FRM Exam Part II · Credit Scoring and Retail Credit Risk Management
In a scorecard development sample, a bin of an applicant characteristic contains 200 goods and 20 bads. The whole sample contains 4,000 goods and 400 bads. Using WOE = ln(% of goods / % of bads), what is the WOE for this bin?
The WOE is zero. The bin holds 5% of all goods (200/4,000) and 5% of all bads (20/400), so the ratio is one and its natural log is zero. The bin's odds match the population odds, meaning it does not discriminate between good and bad borrowers.
- A0.000Correct
- B2.303
- C-0.105
- D0.105
Explanation
The bin's share of goods is 200/4,000 = 5%. Its share of bads is 20/400 = 5%. The ratio is 1, so WOE = ln(1) = 0. The bin's odds equal the population odds (10:1), so it carries no discriminatory information. The 2.303 value comes from using bin odds of 10 alone, ln(10).
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