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 DISCRIMINANT ANALYSIS is a multivariate
technique concerned with separating distinct set of
object/observations and allocating new
object/observation to previously defined groups.
 The need of such techniques becomes a matter of
importance in applied research when we may be
required to assign a given observation in some
optimum fashion to one off several population.
 DISCRIMINANT ANALYSIS is separatory procedure
which provides a basis to investigate observed
differences when causal relationships are not well

 In DISCRIMINANT ANALYSIS the discriminates are

computed numerically in such a way that the
collections are separated as much as possible.

 DISCRIMINANT function analysis is used to

determine which variables discriminate between
two or more naturally occurring classes/groups.
 The concept of discriminant function is
due to R.A. Fisher (1938), who arrived at
a linear classification statistics involving
linear function of the character by
transforming the multivariate observation
from two populations N1 and N2 to one
dimensional scale that discriminates
between the populations by some
measure of maximal separation.
 It has been applied in various empirical studies
in psychology, behavioral science, finance and
so on
 In finance it has been used in:-
- consumer credit evaluation
- earnings ratio classifications
- standard investment categories
- rate of return prediction, and prediction
of corporate failure.

 For instance, in MBA admission to a business

school a candidate may be assigned to the
categories “ admit"," admit conditionally”, or “
admission denied on the basis of vector of test
scores, grades, and rating.
 In banking transactions a loan officer may wish
to classify loan applicants as low or high credit
risks on the basis of certain accounting
 A mortgage company may like to take a
decision whether to approve an applicant’s
mortgage loan the decision is based on
determining whether the applicant
characteristics are more like those of persons in
the past who repaid loans successfully than like
those of persons who defaulted. Information on
these two groups may be available from past
records and would include such factors such as
age, income, marital status, outstanding debt
 A researcher may classify the group of firms
according to whether they had eventually failed
or did not fail, on the basis of independent
variables such as locations, financial ratios or
management changes.