Which of the following statements about multicollinearity is TRUE? SELECT ALL TH

Question

Which of the following statements about multicollinearity is TRUE? SELECT ALL THAT APPLY.

1)Multicollinearity occurs when two or more independent variables are highly correlated

2)Multicollinearity is usually not an issue when the regression model is only being used for forecasting

3)Multicollinearity is usually not an issue when the regression model is only being used to understand net relationships

4)Multicollinearity can typically be reduced by decreasing the sample size

5)Multicollinearity can typically be reduced by adding more independent variables

Explanation / Answer

Ans:

Option 1) and 2) are correct:

Multicollinearity occurs when two or more independent variables are highly correlated

Multicollinearity is usually not an issue when the regression model is only being used for forecasting.

Others are incorrect as:

Increased sample sizes can reduce either the presence or the impact of multicollinearity, or both. Obtaining more data is often the best way to remedy multicollinearity.

Multicollinearity can be resolved by combining the highly correlated variables through principal component analysis, or omitting a variable from the analysis.

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