6.4.

PROPERTIES OF CONDITIONAL EXPECTATION 91

Using this lemma, we can prove the following properties.

Theorem 6.4.2. Properties of Conditional Expectation

a. Linearity:

E[a1X1 + a2X2 | Y ] = a1E[X1 | Y ] + a2E[X2 | Y ]; (6.4.2)

b. Known Factor:

E[Xk(Y ) | Y ] = k(Y )E[X | Y ]; (6.4.3)

c. Averaging:

E(E[X | Y ]) = E(X); (6.4.4)

d. Independence: If X and Y are independent, then

E[X | Y ] = E(X). (6.4.5)

e. Smoothing:

E[E[X | Y, Z] | Y ] = E[X | Y ]. (6.4.6)

Proof:

The derivation of these identities is a simple exercise, but going through it should help

you appreciate the mechanics.

a. Linearity is fairly clear from our original definition (6.1.1), when the conditional

density exists. In the general case, we can use the lemma as follows. We do this derivation

step by step as the other properties follow the same pattern.

To show that the function g(Y ) := a1E[X1 | Y ] + a2E[X2 | Y ] is in fact E[X|Y ] with

X := a1X1 + a2X2, we show that it satisfies (6.4.1). That is, we must show that

E((a1E[X1 | Y ] + a2E[X2 | Y ])h(Y )) = E((a1X1 + a2X2)h(Y )) (6.4.7)

for all h(·). But we know that, for i = 1, 2,

E((aiE[Xi

| Y ])h(Y )) = E(E[Xi
| Y ](aih(Y ))) = E(Xi(aih(Y ))) = E(aiXih(Y )). (6.4.8)

92 CHAPTER 6. CONDITIONAL EXPECTATION

Figure 6.3: Conditional Expectation - Smoothing Property

Indeed, the third identity follows from the property (6.4.1) applied to E[Xi

| Y ] with h(Y )

replaced by aih(Y ). The other identities are obvious.

By adding up the expressions (6.4.8) for i = 1, 2, one gets (6.4.7).

b. To show that g(Y ) := k(Y )E[X|Y ] is equal to E[Xk(Y )|Y ] we prove that it satisfies

(6.4.1). That is, we must show that

E(k(Y )E[X|Y ]h(Y )) = E(Xk(Y )h(Y )), ∀h(·).

This identity follows from the property (6.4.1) of E[X|Y ] where one replaces h(Y ) by

k(Y )h(Y ).

c. The averaging property is a particular case of (6.4.1) where h(Y ) = 1.

d. We use the lemma. Let g(Y ) = E[X|Y ]. We show that for any h(Y ) one has

E(g(Y )h(Y )) = E(E[X|Y, Z]h(Y )). Now, E(E[X|Y, Z]h(Y )) = E(Xh(Y )) by (6.4.1) and

E(g(Y )h(Y )) = E(E[X|Y ]h(Y )) = E(Xh(Y )), also by (6.4.1). This completes the proof.

Figure 6.3 shows why E[E[X|Y, Z]|Y ] = E[X|Y ].