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Correlation between min and max of two uniforms

Question

Draw two independent U(0,1)U(0,1) values and call the smaller one YY and the larger one ZZ. For 0≤y≤z≤10\le y\le z\le 1, compute P(Y≥y∣Z≤z)P(Y\ge y\mid Z\le z), and then find the correlation coefficient of YY and ZZ.

Short answer

P(Y≥y∣Z≤z)=(z−yz)2P(Y\ge y\mid Z\le z)=\left(\tfrac{z-y}{z}\right)^2 and corr⁡(Y,Z)=12\operatorname{corr}(Y,Z)=\tfrac12. Given Z≤zZ\le z both draws are uniform on [0,z][0,z], and both must exceed yy. For the correlation, YZYZ is the product of the two draws, so E[YZ]=14E[YZ]=\tfrac14, giving Cov⁡=14−13⋅23=136\operatorname{Cov}=\tfrac14-\tfrac13\cdot\tfrac23=\tfrac1{36}, while each variance is 118\tfrac1{18}.

Adapted from Zhou, A Practical Guide to Quantitative Finance Interviews, sec. 4.6 Order Statistics, 'Correlation of max and min', p.99; question and answer rewritten by SelfMadeQuant.com.

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