Multicollinearity, Financial Management

Assignment Help:

 

Multicollinearity

As the degree of correlation between the independent variables increases, the regression coefficients become less reliable. That is, although the independent variables may together explain the dependent variable, but because of multicollinearity the coefficients of the explanatory variables may be rejected. It can happen that the model may be accepted (through ANOVA and the F test), but the individual coefficients may be rejected (through the t test). This is because the interplay among the independent variables reduces the influence of the individual variables in the model. In the extreme case, if two variables are identical, then the influence of each one in the model would be reduced. Multicollinearity does not reduce the accuracy of the model (the predictive powers), but it hurts any sensitivity analysis - if we increase one explanatory variable by one unit, what happens?

This is a subject in itself, but the reader should be aware of the importance of multicollinearity.

Multiple Correlation Coefficients

 

So far we have come across correlation coefficients between two variables X and Y. However in the case of a multiple regression equation like

                   Y = a + b1 X1 + b2 X2

we see that Y can be correlated to both X1 and X2. Hence we can have a coefficient of multiple correlation which will measure the correlation between Y and both X1 and X2.

 

 

 


Related Discussions:- Multicollinearity

Definition of financial management, DEFINITION OF FINANCIAL MANAGEMENT ...

DEFINITION OF FINANCIAL MANAGEMENT Financial Management is a stream concerned with the generation and allotment of scarce resources (generally funds) to the most proficient use

Food and beverage industry averages, #What are the food and beverages indus...

#What are the food and beverages industry financial ratios for 2011,2010,2009? 1. Liquidity(current/quick), Asset Management(Inventory Turnover, total assets turnover),Debt Menagem

Define flowcharts - documenting the accounting system, Flowcharts - Documen...

Flowcharts - Documenting the accounting system Depict in outline the sequence of events in a system showing document flow and department or function responsible for every ev

Define the conversion ratio and conversion value, Define the following term...

Define the following terms that relate to a convertible bond:  conversion ratio, conversion value, and straight bond value. The term conversion ratio is the number of shares of c

Illustrate the method of appraising capital investments, Q. Illustrate the ...

Q. Illustrate the method of appraising capital investments? One of the potency of internal rate of return (IRR) as a method of appraising capital investments is that it is a di

Expansion financing, The securing of the working capital needed for the sup...

The securing of the working capital needed for the support of raises in accounts receivable and inventory related with an organizations initial expansion time.

What is gatt, What is GATT, and what is its goal? GATT is the General A...

What is GATT, and what is its goal? GATT is the General Agreement on Tariffs and Trade it is a agreement that seeks to decrease trade barriers among participant nations.

Illustrate methods to manage cash resources, Q. Illustrate Methods to Manag...

Q. Illustrate Methods to Manage cash resources? There are several methods which may be of use in managing resources. The particular tool selected will depend on its reliability

Working capital management, WORKING CAPITAL MANAGEMENT Working capital ...

WORKING CAPITAL MANAGEMENT Working capital relates to the capital required for daily operations of a business enterprise.  The requirement for Working Capital is omnipresent fo

Enhance or maintain its image and reputation, a) Marketing might be vital t...

a) Marketing might be vital to an organisation such as WHSG for several reasons, including: • The need to be a focus for the right kind of students to the school (there are riva

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd