Credit Risk Management Practice Exam

What is the cumulative accuracy profile (CAP) used for in credit scoring?

1. To predict future market trends

2. To assess the performance of a credit scorecard

3. To determine customer loyalty

4. To calculate profit margins

The correct answer is: To assess the performance of a credit scorecard

The cumulative accuracy profile (CAP) is a crucial tool used in credit scoring specifically to assess the performance of a credit scorecard. It provides a visual representation of the ability of a scorecard to distinguish between good and bad credit applicants. By plotting the cumulative percentage of applicants against the cumulative percentage of defaults, stakeholders can evaluate how effectively the scorecard predicts who is likely to default on a loan. In practice, the CAP helps to identify how well the model ranks applicants, providing insights into its predictive power. This information is vital for lenders when making informed decisions about credit risk and for improving their scoring models over time. Effectively employed, the CAP ensures that credit portfolios are managed with accurate risk assessments, leading to better financial outcomes. The other options do not align with the primary purpose of the CAP and focus on different areas, such as market trends, customer relationships, or profitability, which are outside the scope of credit scoring and its assessment methodologies.