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Let U and V be independent random variables with means μ\mu and variances σ2\sigma^{2}. Let Z=αU+V1α2Z=\alpha U+V \sqrt{1-\alpha^{2}}. Find E(Z) and ρUZ\rho_{U Z}.

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We are given that UU and VV are independent random variables such that E(U)=E(V)=μE(U)=E(V)=\mu and Var(U)=Var(V)=σ2.\text{Var}(U) = \text{Var}(V) = \sigma^2. A random variable ZZ is defined as

Z=αU+V1α2,Z=\alpha U + V\sqrt{1-\alpha^2},

for some α[1,1],\alpha \in \mathbb [-1,1], and we need to find the expected value of ZZ and the correlation coefficient of UU and Z.Z.

First, remember the linearity property of the expectation, and use it to find the expected value of Z:Z:

E(Z)=E(αU+V1α2)=αE(U)+1α2E(V)=αμ+μ1α2=μ(α+1α2).\begin{align*} E(Z) & = E(\alpha U + V\sqrt{1-\alpha^2}) = \alpha \cdot E(U) + \sqrt{1-\alpha^2}\cdot E(V) \\\\&= \alpha\cdot\mu + \mu\cdot\sqrt{1-\alpha^2} = \boxed{\mu\cdot(\alpha + \sqrt{1-\alpha^2})}\, . \end{align*}

Next, remember that the correlation coefficient of UU and ZZ is defined as

ρ(U,Z)=Cov(U,Z)Var(U)Var(Z).\rho(U, Z) = \frac{\text{Cov}(U, Z)}{\sqrt{\text{Var}(U)\cdot \text{Var}(Z)}}\, .

Let's first find the covariance of UU and Z.Z. Due to the bilinearity property of the covariance, we have that

Cov(U,Z)=Cov(U,αU+V1α2)=αCov(U,U)=Var(U)=σ2+1α2Cov(U,V)=0=ασ2.\begin{align*} \text{Cov}(U, Z) & = \text{Cov}(U, \, \alpha U + V\sqrt{1-\alpha^2}) \\\\ & = \alpha\cdot\underbrace{\text{Cov}(U, U)}_{=\text{Var}(U)=\sigma^2} + \sqrt{1-\alpha^2}\cdot\underbrace{\text{Cov}(U, V)}_{=0} \\ & = \alpha\cdot \sigma^2. \end{align*}

Here we were able to conclude that Cov(U,V)=0\text{Cov}(U, V) = 0 because UU and VV are independent.

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