Which of the following statements is accurate regarding use of a decision tree t

Question

Which of the following statements is accurate regarding use of a decision tree to determine the likelihood of default on a bank loan?

A. The results of a decision tree analysis cannot be used by a bank to evaluate the risk in a given portfolio of loans.

B. Decision rules can be deduced from a decision tree analysis to identify loans that a given bank will approve, but there is no other use for the decision tree and the decision rules beyond this application.

C. Banks can analyze data from past loans to produce a decision tree that can be converted to loan-decision rules.

D. A financial institution could not use a decision tree based on past loans to assess the default risk on a new loan.

E. An example of a rule deduced by a bank from a decision tree analysis of past loans would be this: If a loan is more than one-half paid, reject the loan

Explanation / Answer

C. Banks can analyze data from past loans to produce a decision tree that can be converted to loan-decision rules.

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