Question

What is multicollinearity? Why is it a problem? List one way through which you can test for the presence multicollinearity.

Answer 1

Multicollinearity is existence of high correlation between independent variables. This generally happens when too many independent variables are included in the model which leads to reduced accuracy levels of prediction and any changes in one variable which has multicollinearity will have impacts which could mislead prediction.

Test to identify:

Correlation coefficient: By finding the correlation coefficient for all pairs of independent variables the presence of multicollinearity can be found out. Values of +1 and -1 indicates strong correlation among independent variables where one of the variable needs to be dropped.