Twelve sales are used to fit a model with eight independent variables. What is the principal concern?
Correct Answer
B) There is too little data for that many variables
Why this is correct: The principal concern is there is too little data for that many variables. With twelve sales and eight independent variables, there are very few degrees of freedom (12 - 8 - 1 = 3 for the intercept). This leads to an unstable model prone to overfitting, as the original explanation describes. Why the other choices are wrong: The dependent variable is not necessarily misidentified. R-squared can still be calculated. The coefficients will not all come out as zero; they may be large and nonsensical. Exam tip: A good rule of thumb is to have at least 10-15 observations per independent variable for reliable regression results.
Why This Is the Correct Answer
Why this is correct: The principal concern is there is too little data for that many variables. With twelve sales and eight independent variables, there are very few degrees of freedom (12 - 8 - 1 = 3 for the intercept). This leads to an unstable model prone to overfitting, as the original explanation describes. Why the other choices are wrong: The dependent variable is not necessarily misidentified. R-squared can still be calculated. The coefficients will not all come out as zero; they may be large and nonsensical. Exam tip: A good rule of thumb is to have at least 10-15 observations per independent variable for reliable regression results.
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