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Answer: Spearman correlation
The correct answer is Spearman correlation. The explanation provided in the file content states that Pearson correlation, correlation matrix, and covariance are used to measure the degree of the relationship between linearly related variables. However, the credit ratings in this question are ordinal data and exhibit a nonlinear relationship as depicted in the graph. Spearman correlation is a non-parametric measure that assesses the strength and direction of the monotonic relationship between two variables, which makes it a more suitable choice for analyzing the link between the rating categories from the two agencies. It does not assume a linear relationship between the variables and is therefore better suited to ordinal data like credit ratings.
Author: LeetQuiz Editorial Team
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Bank XYZ's credit risk manager needs to assess the relationship between the credit rating categories assigned by two different rating agencies, X and Y, for a portfolio of 30 companies. To determine how closely the ratings from these agencies align, which statistical measure would be most effective in estimating the correlation between the credit rating categories provided by these agencies?
A
Spearman correlation
B
Pearson correlation
C
Structured correlation matrix
D
Covariance
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