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Econometrics

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Moderate

Effect of Additional Data on Correlation, Example 1

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Suppose that you initially calculated a correlation statistic for random variables $Y$ and $X$, $\rho = 0.25$. Then, you realize that you omitted an observation:

$$(y=5,\ x=-5)$$

After including this observation and calculating the standard deviations for the two random variables, you find that those values did not change.

What do you predict will happen to the correlation statistic value as a result of adding the observation?

A

The correlation statistic value will not change.

B

The correlation statistic value will decrease.

C

The correlation statistic value will increase.

D

The correlation statistic value will become statistically insignificant from zero.

E

There is not enough information to make the determination.