A bank classifies borrowers as high risk or low risk. 15% of its loans are made to those classified as high risk. Of all loans, 5% are in default and 40% of those in default were made to high-risk borrowers. What is the probability that a high-risk borrower will default?
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- Thread Starter
- 24-10-2017 15:31
- 24-10-2017 16:21
Bayes’ theorem usually raises its head when we know P(A given B) and need to find the value of P(B given A). This question is a case in point. Let P(H) be the probability that a borrower is in the high risk group and P(D) be the overall probability of default. The question gives us P(H given D) and asks us for P(D given H).