11-76 How can discriminant analysis be used to make credit decisions?

Question

Quizplus · Accepted Answer

Discriminant analysis can be used to identify and weight factors (such as financial ratios, industry trends, and management experience) that are most relevant to determining the creditworthiness of a commercial borrower. By analyzing these factors, statistical models can be developed to classify borrowers into low, medium, or high risk categories, allowing lenders to make more informed credit decisions. Discriminant analysis cannot necessarily discriminate between "good" and "bad" borrowers, as different lenders may have different risk profiles and lending criteria. Updating bankruptcy experiences can be one input into the discriminant analysis process, but it is not the only or the most important factor.

11-76 How Can Discriminant Analysis Be Used to Make Credit