conditional variance

Marginal Variance: The definition of the (population) (marginal) variance of a random
variable Y is
Var(Y) = E([Y - E(Y)]2 )
What does this say in words (and pictures)?
There is another formula for Var(Y) that is sometimes useful in computing variances or
proving things about them. It can be obtained by multiplying out the squared expression
in the definition:
Var(Y) = E([Y - E(Y)]2 ) = E(Y2 - 2YE(Y) + [E(Y)]2)
= ________________________________________________________
(Fill in details, and say the final result in words!)
Conditional Variance: Similarly, if we are considering a conditional distribution Y|X,
we define the conditional variance
Var(Y|X) = E([Y - E(Y|X)]2 | X)
(Note that both expected values here are conditional expected values.)
What does this say in words (and pictures)?
Exercise: Derive another formula for the conditional variance, analogous to the second
formula for the marginal variance. (And say it in words!)
Conditional Variance as a Random Variable: As with E(Y|X), we can consider
Var(Y|X) as a random variable. For example, if Y = height and X = sex for persons in a
certain population, then Var(height | sex) is the variable which assigns to each person in
the population the variance of height for that person s sex.
2
Expected Value of the Conditional Variance: Since Var(Y|X) is a random variable, we
can talk about its expected value. Using the formula Var(Y|X) = E(Y2|X) - [E(Y|X)]2, we
have
E(Var(Y|X)) = E(E(Y2|X)) - E([E(Y|X)]2)
We have already seen that the expected value of the conditional expectation of a random
variable is the expected value of the original random variable, so applying this to Y2
gives
(*) E(Var(Y|X)) = E(Y2) - E([E(Y|X)]2)
Variance of the Conditional Expected Value: For what comes next, we will need to
consider the variance of the conditional expected value. Using the second formula for
variance, we have
Var(E(Y|X)) = E([E(Y|X)]2) - [E(E(Y|X))]2
Since E(E(Y|X)) = E(Y), this gives
(**)Var(E(Y|X)) = E([E(Y|X)]2) - [E(Y)]2.
Putting It Together:
Note that (*) and (**) both contain the term E([E(Y|X)]2), but with opposite signs. So
adding them gives:
E(Var(Y|X)) + Var(E(Y|X)) = E(Y2) - [E(Y)]2,
which is just Var(Y). In other words,
(***) Var(Y) = E(Var(Y|X)) + Var(E(Y|X)).
In words: The marginal variance is the sum of the expected value of the conditional
variance and the variance of the conditional means.
Consequences:
I) This says that two things contribute to the marginal (overall) variance: the expected
value of the conditional variance, and the variance of the conditional means. (See