S4E10 Test Driving Model Identification
Quantitude
How Does the Covariance Between X and Y Affect Variance?
In the simplest model that we could think of in our world, there are only two variables: X and Y. The variance of X should just be the variance of X because it's exogenous. What about the covariance between X and Y? That takes a little bit more work but using path tracing or algebra, we would say this decomposes into squared path coefficient times deviation from original.
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