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Question

Let $X$ be a random variable that follows $Uniform(-1, 1)$ distribution. The conditional distribution of the random variable $Y$ given $X = x$ is the $Uniform(x^2 - 0.1, x^2 + 0.1)$ distribution.

The value of $correlation(X, Y)$ is __________ . (Answer in integer)

We need to find the correlation between random variables $X$ and $Y$, denoted as $Corr(X, Y)$.

Understanding Random Variable Distributions

  • $X$ follows a $Uniform(-1, 1)$ distribution.
  • The conditional distribution of $Y$ given $X=x$ is $Uniform(x^2 - 0.1, x^2 + 0.1)$.

Calculating Expected Values

First, let's find the expected value of $X$ and $Y$ given $X=x$.

  • For $X \sim Uniform(a, b)$, the expected value is $E[X] = \frac{a+b}{2}$.
    So, $E[X] = \frac{-1 + 1}{2} = 0$.
  • For $Y|X=x \sim Uniform(x^2 - 0.1, x^2 + 0.1)$, the conditional expectation is: $E[Y|X=x] = \frac{(x^2 - 0.1) + (x^2 + 0.1)}{2} = \frac{2x^2}{2} = x^2$.

Calculating Overall Expected Value E[Y]

Using the law of total expectation, $E[Y] = E[E[Y|X]]$:

$E[Y] = E[X^2]$

For $X \sim Uniform(a, b)$, $E[X^2] = \frac{a^2 + ab + b^2}{3}$.
Here, $a = -1$ and $b = 1$.
$E[X^2] = \frac{(-1)^2 + (-1)(1) + (1)^2}{3} = \frac{1 - 1 + 1}{3} = \frac{1}{3}$.
Therefore, $E[Y] = \frac{1}{3}$.

Calculating Covariance Cov(X, Y)

The formula for covariance is $Cov(X, Y) = E[XY] - E[X]E[Y]$.

We need $E[XY]$. Using the law of total expectation again:

$E[XY] = E[E[XY|X]] = E[X \cdot E[Y|X]]$

Substitute $E[Y|X] = X^2$:
$E[XY] = E[X \cdot X^2] = E[X^3]$.

For $X \sim Uniform(-1, 1)$, $E[X^k] = \frac{1}{1 - (-1)} \int_{-1}^{1} x^k dx$.

Calculate $E[X^3]$:
$E[X^3] = \frac{1}{2} \int_{-1}^{1} x^3 dx = \frac{1}{2} \left[ \frac{x^4}{4} \right]_{-1}^{1} = \frac{1}{2} \left( \frac{1^4}{4} - \frac{(-1)^4}{4} \right) = \frac{1}{2} \left( \frac{1}{4} - \frac{1}{4} \right) = 0$.
So, $E[XY] = 0$.

Now, calculate the covariance:
$Cov(X, Y) = E[XY] - E[X]E[Y] = 0 - (0) \cdot (\frac{1}{3}) = 0$.

Calculating Correlation Corr(X, Y)

The correlation is calculated as $Corr(X, Y) = \frac{Cov(X, Y)}{\sqrt{Var(X) Var(Y)}}$.

Since $Cov(X, Y) = 0$, and the variances $Var(X)$ and $Var(Y)$ are finite and non-zero (specifically $Var(X) = \frac{(1-(-1))^2}{12} = \frac{4}{12} = \frac{1}{3}$), the correlation is:

$Corr(X, Y) = \frac{0}{\sqrt{Var(X) Var(Y)}} = 0$.

Final Answer

The value of $correlation(X, Y)$ is 0.

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Important Questions from Correlation Analysis

  1. If X ∼ N (0, 1) and Y = X2 then the correlation coefficient r (X, Y) is

  2. Given below are two statements: One is labelled as Assertion (A) and the other is labelled as Reason (R).

    Assertion (A): If the securities with less than perfect negative correlation between their price movements are combined, portfolio risk can be reduced significantly.

    Reason (R): The term with negative correlation has the effect of reducing the computed value of total portfolio risk, given other terms that are positive.

    In the light of the above statements, choose the most appropriate answer from the options given below:

  3. Consider two exponentially distributed random variables X and Y, both having a mean of 0.50. Let Z = X + Y and r be the correlation coefficient between X and Y. If the variance of Z equals 0, then the value of r is _______ (round off to 2 decimal places).

  4. The two-regression equation of variable \(\rm{x}\) and \(\rm{y}\)  are

    \(\rm{y = 0.8x + 9.8}\) and \(\rm{x = 10.2 + 0.6y}\)

    The coefficient of correlation between \(\rm{x}\) and \(\rm{y}\) is

  5. In which conditions, Karl Pearson's correlation coefficient can be calculated ?
    A. If means of both the variables are equal
    B. If one variable is measured in interval scale and another is measured in ordinal scale
    C. If there is linear relationship between two variables
    D. If data are obtained in interval or ratio scale for both the variables
    E. If direction of relationship between two variables is known
    Choose the most appropriate answer from the options given below :
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