An Automobile Finance Company Analyzed a Sample of Recent Automobile

question 21

Multiple Choice

An automobile finance company analyzed a sample of recent automobile loans to try to determine key factors in identifying borrowers who would be likely to default on their auto loan. The response variable Default equals 1 if the borrower defaulted during the term of the loan and 0 otherwise. The predictor variable AutoDebt% was the ratio (expressed as a percent) of the required loan payments to the borrower's take-home income at the time of purchase. JobTime was the number of years the borrower had worked at their current job at the time of purchase. CredScore was the borrower's credit score at the time of purchase. Below is part of the classification tree the finance company derived from the data collected in the study. Assume they classify those with a default probability estimate of at least .5 as Defaulters. A potential borrower with a credit score of 717 who has been at their current job for 3 years is considering applying for a loan. They do not yet have a particular loan amount in mind. Based on this classification tree, the best estimate that this loan applicant would default would be ________.

• A) .000
• B) .347
• C) .552
• D) .867
• E) 1.000

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Definitions:

Quantity of Lattés

The total amount or number of lattés produced or served, used often in economic contexts to discuss consumer choice or market demand.

Labor Necessary

The essential work or effort required to produce goods and services, considered as one of the factors of production.

Microprocessors

Integrated circuits that contain the functions of a computer's central processing unit (CPU), serving as the brains of computers, smartphones, and other electronic devices.

Market for Laptops

The demand and supply ecosystem for laptops, involving both consumers seeking to purchase laptops and manufacturers or retailers selling them.