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Covariance of exponential X and lognormal Y given X

Question

Let XX be exponential with rate 11, and conditionally on X=xX=x let log⁡Y\log Y be normal with mean 00 and variance xx. Compute Cov⁡(X,Y)\operatorname{Cov}(X,Y).

Short answer

22. Conditionally E[Y∣X]=eX/2\mathbb{E}[Y\mid X]=e^{X/2}. Then E[Y]=E[eX/2]=2\mathbb{E}[Y]=\mathbb{E}[e^{X/2}]=2 (the exponential MGF at 12\tfrac12) and E[XY]=E[XeX/2]=∫0∞xe−x/2dx=4\mathbb{E}[XY]=\mathbb{E}[Xe^{X/2}]=\int_0^\infty xe^{-x/2}dx=4. So the covariance is 4−1⋅2=24-1\cdot2=2.

Adapted from QuantQuestions.io; question and answer rewritten by SelfMadeQuant.com.

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