Description
1 Credit rating prediction
Financial corporations regularly need to assess the creditworthiness of potential borrowers or debtors. Credit rating agencies (e.g., Standard & Poor’s, Moody’s, Fitch Ratings)
provide a service by assigning credit ratings to organisations (companies, sovereign governments, etc.) based on their creditworthiness. The ratings are typically designated
using letters, for example, AAA, AA, A, BBB, BB, B, CCC (in decreasing creditworthiness),
and each agency has its own set of symbols. Given the fundamental importance of
credit, credit ratings play a major role in the financial system.
Credit ratings are assigned by analysing financial information on the borrower. In
the case of corporate borrowers, information such as working capital, total assets, total
debts etc., are used to assess creditworthiness. More specifically, a set of financial ratios
of a company are used, for example,
• Working capital / Total Assets (WC TA)
• Retained Earnings / Total Assets (RE TA)
• Earnings Before Interests and Taxes / Total Assets (EBIT TA)
• Market Value of Equity / Book Value of Total Debt (MVE BVTD)
• Sales / Total Assets (S TA)
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The grading process is typically done based on expert analysis. Increasingly, however,
the assignment of credit ratings is done by automated algorithms, especially for relatively
small loans offered to a large market of potential borrowers (e.g., small enterprises). This
assignment concerns building an automated credit rating prediction tool.
1.1 Decision tree learning
A sample set of training data is given in the file previous.txt (see MyUni). The file
contains information acquired from 2,000 companies. The first line is a header containing
the names of the columns. Each subsequent line contains values of five attributes (WC TA,
RE TA, EBIT TA, MVE BVTD, S TA) of a company, as well as a credit rating (one of AAA,
AA, A, BBB, BB, B, CCC) assigned previously by a human expert.
From the given training data, our goal is to learn a function that can predict the
credit rating of a new company, based on the financial ratios of the company. In this
assignment, the predictor function will be constructed as a decision tree. Since the
attributes (financial ratios) are continuous valued, we shall apply the DTL algorithm
for continuous data, as outlined in Algorithms 1 and 2. Once the tree is constructed,
Algorithm 3 can be used to assign credit rating to a new company.
Algorithm 1 DTL(data, minleaf)
Require: data in the form of N input-output pairs {xi
, yi}
N
i=1, minleaf ≥ 1.
1: if (N ≤ minleaf) or (yi = yj
for all i, j) or (xi = xj
for all i, j) then
2: Create new leaf node n.
3: if there is a unique mode (most frequent value) in {yi}
N
i=1 then
4: n.label ← mode in {yi}
N
i=1
5: else
6: n.label ← unknown
7: end if
8: return n.
9: end if
10: [attr,splitval] ← choose-split(data)
11: Create new node n.
12: n.attr ← attr
13: n.splitval ← splitval
14: n.lef t ← DTL(data with xi
[attr] ≤ splitval, minleaf)
15: n.right ← DTL(data with xi
[attr] > splitval, minleaf)
16: return n.
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Algorithm 2 choose-split(data)
Require: data in the form of N input output pairs {xi
, yi}
N
i=1.
1: bestgain ← 0
2: for each attr in data do
3: Sort the array x1[attr], x2[attr], . . . , xN [attr]. // Can you speed this up?
4: for i = 1, 2, . . . , N − 1 do
5: splitval ← 0.5(xi
[attr] + xi+1[attr])
6: gain ← Information gain of (attr, splitval) // See lecture slides.
7: if gain > bestgain then
8: bestattr ← attr and bestsplitval ← splitval
9: end if
10: end for
11: end for
12: return (bestattr, bestsplitval).
Algorithm 3 predict(n, data)
Require: Decision tree with root node n, data in the form of attribute values x.
1: while n is not a leaf node do
2: if x[n.attr] ≤ n.splitval then
3: n ← n.lef t
4: else
5: n ← n.right
6: end if
7: end while
8: return n.label.
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1.2 Deliverables
Implement decision trees for credit rating prediction in C/C++, Java or Python. In the
case of C/C++, you must supply a makefile (Makefile) with a rule called creditrating
to compile your program into a Linux executable named creditrating.bin. Your
program must be able to be compiled and run as follows:
$ make creditrating
$ ./creditrating.bin [train] [test] [minleaf]
In the case of Java, write your program in the file creditrating.java. Your program
must be able to be compiled and run as follows:
$ javac creditrating.java
$ java creditrating [train] [test] [minleaf]
In the case of Python (see below on Python version), write you program in the file
creditrating.py. Your program must be able to be run as follows:
$ python creditrating.py [train] [test] [minleaf]
The marking program will decide which of the above to invoke using the following
structure:
if Makefile exists then
Compile and run C/C++ submission.
else if creditrating.java exists then
Compile and run Java submission.
else
Run Python submission.
end if
On Python version At the moment, only an older version of Python (version 2.7.5)
is supported on the school servers. If you are not familiar enough with this version of
Python, PLEASE DO NOT USE PYTHON for the assignment.
Yes, the school should get on with the times and install the latest version of Python.
Yes, Python is a popular programming language for AI, but really mainly for deep
learning methods (note that this assignment is not about deep learning). When the
opportunity arises feedback will be given to the school to update the Python version.
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Explanation of the input parameters
• [train] specifies the path to a set of training data (input-output pairs), which is
a text file formatted according to the sample previous.txt above.
• [test] specifies the path to a set of testing data, which is a text file where the
first line is a header containing the names of the columns, and each subsequent
line contains the five financial ratios of a company; see file new.txt (available on
MyUni) for an example.
• [minleaf] is an integer greater than zero which specifies the second input parameter to the DTL algorithm (Algorithm 1).
Given the inputs, your program must learn a decision tree (following the prescribed
algorithms) using the training data, then predict the credit rating of each of the company
in the testing data. Your program must then print to standard output (i.e., the command
prompt) the list of predicted credit ratings, vertically based on the order in which the
testing cases appear in [test].
As an example and sanity test for your program, executing DTL using only the first100 entries in previous.txt as training data with minleaf = 20 yields the decision
tree show in Figure 1. Note that it is not a requirement to write a function to print
a decision tree in the manner in Figure 1 (though such a function may be useful for
debugging). Thus you may store your decision tree in whichever internal format/data
structure you find convenient, as long as it is time and memory efficient.
1.3 Expected run time
Your program must be able to terminate within 30 seconds on the sample data given.
1.4 Web submission
You must submit your program on the Computer Science Web Submission System.
This means you must create the assignment under your own SVN repository to store
the submission files. The SVN key for this submission is
2020/s1/ai/Assignment2
The link to the Web Submission System used for this assignment is
https://cs.adelaide.edu.au/services/websubmission/
For more details on the online submission procedures including SVN, visit the home
page of the school and look under “Information for Current Students”.
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1. If MVE_BVTD <= 1.3820, goto 2, else goto 3.
2. If MVE_BVTD <= 0.5745, goto 4, else goto 5.
3. If MVE_BVTD <= 3.2610, goto 6, else goto 7.
4. If RE_TA <= -0.5550, goto 8, else goto 9.
5. If RE_TA <= 0.0645, goto 10, else goto 11.
6. If MVE_BVTD <= 2.1250, goto 12, else goto 13.
7. Return rating AAA.
8. Return rating CCC.
9. Return rating BB.
10. Return rating BB.
11. If EBIT_TA <= 0.0710, goto 14, else goto 15.
12. Return rating A.
13. Return rating AA.
14. If EBIT_TA <= 0.0480, goto 16, else goto 17.
15. Return rating BB.
16. Return rating BBB.
17. Return rating BBB.
Figure 1: Decision tree learnt from first-100 entries in previous.txt and minleaf = 20.
1.5 Due date and late submission policy
This assignment is due by 11:59pm Monday 4 May. If your submission is late the
maximum mark you can obtain will be reduced by 25% per day (or part thereof) past
the due date or any extension you are granted.
1.6 Grading
I will compile and run your code on different tests. If it passes all tests you will get
15% (undergrads) or 12% (postgrads) of the overall course mark.
There will be no further manual inspection/grading of your program to award marks
on the basis of coding style, commenting or “amount” of code written.
1.7 Using other source code
You may not use other source code for this assignment. All submitted code must be
your own work written from scratch. Only by writing the solution yourself will you fully
understand the concept.
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Continues next page for postgraduate section.
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2 Cross validation
For postgraduate students, completing this section will give you the remaining 3% of
the assignment marks.
A critical parameter in the decision tree learning algorithm is minleaf. As the
name suggests, this parameter specifies the minimum number of data points “stored”
in each leaf node. Effectively minleaf controls tree growth: a larger minleaf value
stops the expansion of a branch of the tree earlier than a smaller minleaf value. More
fundamentally, minleaf implements a form of tree pruning that controls the complexity
of the decision function learned by the tree. To ensure good generalisation to unseen
before data, it is vital to set an appropriate value for minleaf.
A standard framework to decide the value of such hyperparameters in learning algorithms is cross validation (also called K-fold cross validation). The basic idea is to
partition the training data into K mutually exclusive subsets. One of the subsets is
sequestered as the “testing data”, and the learning algorithm (with a specific setting of
the hyperparameters) is invoked on the other K −1 subsets to learn a decision function.
The decision function is then applied on the unused subset, and the accuracy is recorded
(note that since the unused subset is actually from the training data, target labels are
available for comparison). The hyperparameter values are then changed and the process
is repeated. Algorithm 4 outlines the cross validation method.
The goal in this section is to implement and conduct cross validation to select the
appropriate value of minleaf for credit rating prediction.
2.1 Deliverables
Write your program in Java, C/C++ or Python. In the case of C/C++, in the same
makefile as in Sec. 1, you must create another rule called kfoldcross to compile your
program into a Linux executable binary named kfoldcross.bin. Your program must
be able to be compiled and run as follows:
$ make kfoldcross
$ ./kfoldcross.bin [train] [K] [minleaf1] [minleaf2] ... [minleafM]
In the case of Java, write your program in the file kfoldcross.java. Your program
must be able to be compiled and run as follows:
$ javac kfoldcross.java
$ java kfoldcross [train] [K] [minleaf1] [minleaf2] ... [minleafM]
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Algorithm 4 K-fold cross validation
Require: Training data D = {xi
, yi}
N
i=1, number of folds K, hyperparameter values to
test h1, h2, . . . , hM.
1: Z ← N/K // Assume N is divisible by K.
2: Separate D into K subsets {Dk}
K
k=1, where each Dk = {xi
, yi}
(k−1)Z+Z
i=(k−1)Z+1.
3: for m = 1, 2, . . . , M do
4: accerrm ← 0
5: for t = 1, 2, . . . , K do
6: Retain Dt as the testing data.
7: On the other subsets {Dk}k6=t
, invoke the learning algorithm with hyperparameter hm to produce a decision function.
8: Test the decision function on Dt and record percent error as errt
.
9: accerrm ← accerrm + errt
10: end for
11: avgerrm ← accerrm/K
12: end for
13: return Return hyperparameter with the lowest average error.
In the case of Python (version 2.7.5 only), write you program in the file kfoldcross.py.
Your program must be able to be run as follows:
$ python kfoldcross.py [train] [K] [minleaf1] [minleaf2] ... [minleafM]
Explanation of the input parameters
• [train] specifies the path to a set of training data (input-output pairs), which is
a text file formatted according to the sample previous.txt above.
• [K] specifies the number of folds to use in cross validation.
• [minleaf1], [minleaf2], ..., [minleafM] are different choices of minleaf values
for the DTL algorithm (Algorithm 1).
Given the inputs, your program must conduct cross validation (Algorithm 4) to
select the best minleaf value among the choices given. The best minleaf value is then
printed to standard output.
Besides writing the program, conduct your own experimentation to see what the
appropriate values for minleaf are on the sample data given in Sec. 1. Upload a file
named crossval.pdf in PDF format containing a plot of average error versus minleaf,
for the range minleaf ∈ [10, 200]. Figure 2 shows what the graph should look like.
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20 40 60 80 100 120 140 160 180 200 0
20
40
60
80
100
minleaf
average error (%)
Plot average error versus minleaf here
Figure 2: Upload a file named crossval.pdf that contains the above graph.
2.2 Submission policies
Submit your program and file in the same way as the previous section. The due date
and code reuse policies are also the same.
2.3 Grading
I will test your program manually to see if it satisfies the required functionalities.
∼∼∼ The End ∼∼∼
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