University of Central Florida (UCF) QMB3200 Quantitative Business Tools II Final Practice Exam

A residual plot displaying nonconstant variance, or heteroscedasticity, suggests that the variability of the residuals increases or decreases as the value of the independent variable x changes. In practical terms, this means that the errors in predictions are not uniform across all levels of x; instead, they may grow larger or smaller when x increases.

This behavior typically indicates that the model's ability to predict the dependent variable y becomes less reliable as x increases. For instance, if the spread of the residuals increases with larger values of x, it signals that predictions made for those larger values of x are associated with greater uncertainty and potential inaccuracies. Therefore, as a result of this increasing variability, one cannot confidently assert that the model will provide consistent or accurate predictions for y as x continues to rise. This is why the conclusion discerned from such a residual plot is that prediction accuracy diminishes as x increases.