... that no decision variable could yield better decisions than likelihood ratio. Therefore likelihood ratio is an essential component of optimal decision making. Although this theory is well known, ... densities is also needed, that is, fd+n (x) = p·fd + (1 − p)fn where p is the probability of financial distress. The ordinate of a CAP curve is Fd (c), and the abscissa of a CAP curve is Fd+n ... R is an ordinal rating of value k, J is a dummy variable (non-distressed countries = 0 and distressed countries = 1), kc is the location of the decision threshold for rating k, and d′ is...