Society of Actuaries (SOA) PA Practice Exam

What is an advantage of using PCA in feature development for supervised predictive models?

1. It maintains high correlation with the target variable

2. It eliminates the need for model fitting

3. It reduces dimensionality while capturing variance

4. It operates independently of categorical variables

The correct answer is: It reduces dimensionality while capturing variance

Using Principal Component Analysis (PCA) in feature development for supervised predictive models provides the key advantage of reducing dimensionality while capturing variance. This means that PCA transforms the original features into a new set of components (principal components) that represent the maximum amount of variance in the dataset. By focusing on the components that explain the most variance, PCA effectively condenses the information from a potentially large number of correlated features into fewer uncorrelated features. This dimensionality reduction is beneficial because it enhances the model’s efficiency by decreasing the computational cost, and it can also help improve model performance by mitigating the risk of overfitting. Additionally, with fewer features, it becomes easier to visualize and interpret the data, which can be particularly valuable during exploratory data analysis. The other options present misunderstandings of PCA's capabilities. Maintaining high correlation with the target variable is not guaranteed; PCA focuses on variance rather than direct relationships with the target. Eliminating the need for model fitting is incorrect, as PCA is a preprocessing step and ultimately, model fitting remains essential. Finally, while PCA can handle continuous variables well, it does not operate independently of categorical variables since categorical variables need to be appropriately encoded for PCA to be applied effectively.