Hi I need some help here please!!!!
Recall the earlier example of assessing the risk of loan defaults. Suppose
the bank’s top managers are divided on whether to adopt the scoring
system permanently. A number of top officers believe their intuitive
judgment about risks is superior to an “artificial” score. Accordingly, the
bank decides to test its judgment against the scoring system. The
managers will make their own designations of loans to the four
categories and see how well they can identify problem loans. Their track
record over the past year is shown in the table:
Category Performing Loan Defaulted Loan
zero risk 0.25 0.20
solid 0.30 0.25
uncertain 0.40 0.45
high risk 0.05 0.10
total 1 1
a. Predict the probability of default for each loan category. (Assume the overall default rate is 10 percent: Pr(default) .1.) b. How do these risk assessments, based on judgment and intuition, compare with the earlier predictions based on credit scores? Which seems to provide more valuable information? Explain.
| a. | ||||||
| Category | Performing Loan | Defaulted Loan | Probability of default(defaulted loan/Total loan) | ie. | Overall default rate 10%*individual probability | |
| Zero Risk | 0.25 | 0.2 | 0.2/(0.25+0.2)= | 0.44 | 44.44% | 4.44% |
| Solid | 0.3 | 0.25 | 0.25/(0.3+0.25)= | 0.45 | 45.45% | 4.55% |
| Uncertain | 0.4 | 0.45 | 0.45/(0.4+0.45)= | 0.53 | 52.94% | 5.29% |
| High risk | 0.05 | 0.1 | 0.1/(0.05+0.1)= | 0.67 | 66.67% | 6.67%v |
Hi I need some help here please!!!! Recall the earlier example of assessing the risk of...