Module 3 Short Answer (3 Marks) Consider a bank that is using a credit scoring model to evaluate small business loan applications.

a) How would you define a type 1 error for this credit scoring model? (0.5 marks)

b) Would you expect a negative correlation, a positive correlation or no correlation between Type 1 and Type 2 errors for this model? Explain your answer. (1.5 marks)

c) You employ a reject inference model to estimate the proportion of type 2 errors. The model estimates type 2 errors at 3%. How might you test the validity of the model? (1 mark)