Correlation from a summed variance

Two random variables have standard deviations σX=5\sigma_X = 5 and σY=12\sigma_Y = 12. You are told that their sum has standard deviation σX+Y=17\sigma_{X+Y} = 17. What is the correlation ρ(X,Y)\rho(X,Y)?

Show hints (2)+
  1. Write Var(X+Y)=σX2+σY2+2ρσXσY\operatorname{Var}(X+Y) = \sigma_X^2 + \sigma_Y^2 + 2\rho\,\sigma_X\sigma_Y and substitute the three variances.
  2. When do standard deviations add exactly, σX+Y=σX+σY\sigma_{X+Y} = \sigma_X + \sigma_Y? That case pins down ρ\rho on sight.

Answer

Reveal answer →

1

Want the full step-by-step worked solution? It's part of Premium - along with a worked solution for every question in the bank.

Asked at: Optiver, IMC

Related questions