CCM Data Analysis & Decision Making 3 — Questions and Answers
Question 1: In a credit risk model, a confusion matrix shows 90 true positives, 10 false negatives, 15 false positives, and 85 true negatives. What is the model's precision?
- 82.5%
- 85.7% (Correct answer)
- 90.0%
- 87.4%
Correct answer: 85.7%
Precision = True Positives / (True Positives + False Positives) = 90 / (90 + 15) = 85.7%.
Question 2: A credit manager uses a decision tree model to approve or deny credit. The model's primary advantage in a credit context is:
- It always outperforms logistic regression in predictive accuracy
- It provides interpretable, rule-based outputs that can be explained to applicants (Correct answer)
- It eliminates the need for historical data
- It automatically handles macroeconomic variables
Correct answer: It provides interpretable, rule-based outputs that can be explained to applicants
Decision trees produce human-readable if-then rules, which are valuable for regulatory compliance and explaining credit decisions to applicants.
Question 3: Which metric is most useful for assessing the efficiency of a company's collection efforts relative to its credit sales?
- Current ratio
- Collection effectiveness index (CEI) (Correct answer)
- Return on assets
- Debt-to-equity ratio
Correct answer: Collection effectiveness index (CEI)
The Collection Effectiveness Index measures what percentage of receivables that could have been collected in a period were actually collected.
Question 4: When analyzing a customer's financial statements, a credit manager observes that inventory turnover has dropped significantly while receivables turnover remains stable. This most likely indicates:
- Improved cash conversion cycle
- Potential product obsolescence or weakening sales demand (Correct answer)
- Aggressive early payment discount programs
- Improved credit quality of the customer base
Correct answer: Potential product obsolescence or weakening sales demand
A declining inventory turnover with stable receivables turnover suggests the company is struggling to sell inventory, signaling possible obsolescence or demand issues.
Question 5: A credit department tracks the percentage of invoices disputed by customers. This metric is best classified as:
- A lagging indicator of customer satisfaction and invoice accuracy (Correct answer)
- A leading indicator of future write-offs
- A measure of collection team productivity
- An external benchmark for industry comparison
Correct answer: A lagging indicator of customer satisfaction and invoice accuracy
Dispute rates are lagging indicators reflecting past invoice accuracy, billing process quality, and customer satisfaction after delivery.
Question 6: In Altman's Z-Score model, which financial ratio captures a company's ability to generate earnings relative to its total assets?
- Working capital / Total assets
- Retained earnings / Total assets
- EBIT / Total assets (Correct answer)
- Market value of equity / Book value of total liabilities
Correct answer: EBIT / Total assets
The EBIT / Total assets ratio in the Z-Score model measures asset productivity and is designated as X3 in Altman's original formula.
Question 7: A credit manager wants to segment 5,000 customers into risk tiers without predefined categories. Which analytical approach is most appropriate?
- Logistic regression
- K-means clustering (Correct answer)
- Linear discriminant analysis
- Time series forecasting
Correct answer: K-means clustering
K-means clustering is an unsupervised technique that groups data points into a specified number of clusters based on similarity, ideal when categories are not predefined.
CCM Data Analysis & Decision Making 3
In a credit risk model, a confusion matrix shows 90 true positives, 10 false negatives, 15 false positives, and 85 true negatives.
What is the model's precision?