[3 points] Generate a random training/validation index that implements a 70/30 split • Use a random seed of your choice. 2. [7 points] Estimate two logistic specifications that allow you to generate out-of-sample predictions of y. Take the following points into account: • You choose the variables X that enter each model specification. These variables X can be continuous or categorical. Make sure continuous and categorical variables are entered appropriately into the models. • Specify model 1 as the simplest of the two. This model must include at least 5 explanatory variables. • Specify model 2 as the richer/more flexible of the two. Control flexibility through the set of X variables used. Include at least one variable interaction. [An interaction of two variables, x1 and x2, would be x3 = x1*x2.3. [2 points] Do any of your models exhibit signs of overfitting? Explain. 4. [3 points] Provide a discussion of which of the two models you would prefer for the purpose of identifying consumers who will default in the future. If needed, make assumptions.
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