Which of the Following Is the Major Weakness of the Linear

question 109

Multiple Choice

Which of the following is the major weakness of the linear probability model?

• A)The model is based on past data of the borrower.
• B)Measurement of the loan risk is difficult.
• C)Estimated probabilities of default may lie outside the interval 0 to 1.
• D)Neither the market value of a firm's assets nor the volatility of the firm's assets is directly observed.
• E)None of the above is a weakness of the linear probability model.

---

Definitions:

Interest Rate

is the percentage of principal charged by the lender for the use of its money or the return earned on deposit accounts.

Present Value

The current value of a future amount of money or stream of cash flows, discounted at a particular interest rate.

Simple Interest

Interest assessed only on the principal sum, or on the part of the principal that still needs to be repaid.

Principal Amount

The original sum of money borrowed in a loan or invested, distinct from interest or profit earned.