Three random variables X, Y, and Z have equal variance of σ² = 2. X is independent of both Y and Z, and that Y and Z are correlated with a correlation coefficient of 0.8. What is the covariance between Z and V given that V = 3X − 2Y. | Financial Risk Manager Part 1 Quiz - LeetQuiz
Financial Risk Manager Part 1
Explanation:
Explanation
To find the covariance between Z and V where V = 3X - 2Y:
Step 1: Apply covariance properties
Using the linearity property of covariance:
Cov(Z,V)=Cov(Z,3X−2Y)=3Cov(Z,X)−2Cov(Z,Y)
Step 2: Simplify using independence
Since X is independent of both Y and Z:
Cov(Z,X)=0
Therefore:
Cov(Z,V)=0−2Cov(Z,Y)=−2Cov(Z,Y)
Step 3: Calculate Cov(Z, Y)
Given that the correlation coefficient between Y and Z is ρ = 0.8, and all variables have equal variance σ² = 2:
Cov(Z,Y)=ρZY×σZ×σY=0.8×2×2=0.8×2=1.6
Step 4: Final calculation
Cov(Z,V)=−2×1.6=−3.2
Key points:
When variables are independent, their covariance is zero
Three random variables X, Y, and Z have equal variance of σ² = 2. X is independent of both Y and Z, and that Y and Z are correlated with a correlation coefficient of 0.8. What is the covariance between Z and V given that V = 3X − 2Y.