Multicollinearity. Consider the following regression model:
yi = β0 + β1x1i + β2x2i + β3x3i + β4x4i + ei
Multicollinearity is suspected to exist among the four explanatory variables used in this regression. The analyst using the regression computes pair wise correlations between the four explanatory variables and the dependent variable. The following correlation matrix results:
Based on these correlations, the analyst concludes that there will be no problems with multicollinearity. Do these correlations provide sufficient evidence to conclude that multicollinearity will not be a problem? Justify your answer.
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