The manager of the commercial loan department for a bank wants to develop a rule to use in determining whether or not to approve various requests for loans. The manager believes that three key characteristics of a company’s performance are important in making this decision: liquidity, profitability, and activity. The manager measures liquidity as the ratio of current assets to current liabilities. Profitability is measured as the ratio of net profit to sales. Activity is measured as the ratio of sales to fixed assets. The manager has collected the data found in the file Dat10-10.xls on your data disk containing a sample of 18 loans that the bank has made in the past five years. These loans have been classified into two groups:

(1) Those that were acceptable and

(2) Those that should have been rejected.

a. What are the coordinates of the centroids for the two groups?

b. Use the regression approach to two-group DA to develop a classification rule for predicting whether or not a given loan applicant will repay the loan, if approved. State your classification rule.

c. Create a confusion matrix that summarizes the accuracy of your classification rule on the data for the current loans. Overall, how accurate does your classification rule seem?

d. Suppose that the manager receives loan applications from companies with the following financial information. According to DA, which of these companies do you expect to be acceptable creditrisks?

Transcribed Image Text:

Company Liqidity Profitability Activity 1.58 1.67 143 1.23 1.78 0.78 0.91 0.68 0.78 0.67 0.27 0.23 0.33 0.23 0.26