Data Analysis & Decision Making Flashcards

A credit manager is reviewing a Pareto analysis of overdue accounts. The analysis shows that 18% of customers account for 79% of overdue balances. What action does this analysis most directly support?

Answer: Prioritizing collection resources on the concentrated group of high-balance delinquent accounts

Pareto analysis (80/20 rule) directs attention to the small subset of accounts driving the majority of exposure, enabling targeted resource allocation.

In credit portfolio management, what does a high positive correlation between two industry segments in a portfolio indicate?

Answer: Concentration risk — both segments tend to deteriorate simultaneously

High positive correlation means both segments move together, so a downturn hits both at once, increasing concentration risk rather than providing diversification.

A credit department uses a scorecard where a score above 650 is approved, 550–650 is referred, and below 550 is declined. A new applicant scores 648. Under a strict cut-off policy, what should the credit manager do?

Answer: Refer the application for manual review according to the defined policy

A score of 648 falls within the 550–650 referral band, so the defined policy mandates a manual review rather than automatic approval or decline.

Which method is most appropriate for forecasting a company's future cash flow when multiple uncertain variables interact simultaneously?

Answer: Monte Carlo simulation

Monte Carlo simulation runs thousands of iterations with random variable inputs to generate a probability distribution of possible cash flow outcomes.

A credit analyst compares a customer's current ratio of 1.1 to an industry benchmark of 1.8. The most important next step in the analysis is to:

Answer: Investigate the composition of current assets and liabilities to understand liquidity quality

Ratios alone can be misleading; understanding whether current assets are liquid (cash, receivables) versus illiquid (stale inventory) provides the critical context.

A company's Days Payable Outstanding (DPO) has increased from 30 to 55 days while its suppliers have not changed payment terms. From a credit analysis perspective, this most likely signals:

Answer: Potential liquidity pressure causing the company to slow payments to suppliers

An unexplained increase in DPO without changed terms typically indicates the company is stretching payables due to cash flow constraints.

Which of the following best describes the purpose of a KS (Kolmogorov-Smirnov) statistic in credit model validation?

Answer: It quantifies the maximum separation between the cumulative distributions of good and bad accounts

The KS statistic measures the maximum distance between the cumulative distribution functions of good and bad accounts, reflecting the model's discriminatory power.