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Can you show me step by step how to solve? Suppose the estimated linear probability model used by an FI to predict business loan applicant
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Suppose the estimated linear probability model used by an FI to predict business loan applicant default probabilities is PD0.05X1 + 0.025X2 - 0.06X3 + error where Xi is the borrower's debt/equity ratio, X2 is the volatility of borrower earnings, X3 is the borrower's profit ratio. For a paticular loan applicant, Xi 0.70, X2-0.35, and X 0.20 (1) What is the projected probability of default for the borrower? (2) What is the projected probability of repayment if the debt/equity ratio is 2.5? (3) What is a major weakness of the linear probability modelStep by Step Solution
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