Investopedia

Continue to Site »

Error Term

Filed Under » ,
Dictionary Says

Definition of 'Error Term'

A variable in a statistical and/or mathematical model, which is created when the model does not fully represent the actual relationship between the independent variable(s) and the dependent variable. As a result of this incomplete relationship, the error term is the amount at which the equation may differ during empirical analysis.

The error term is also known as the "residual", or the "remainder" term.
Investopedia Says

Investopedia explains 'Error Term'

An error term essentially means that the model will not be completely accurate, and will result in differing results during real world applications. For example, assume there is a multiple linear regression function that takes the form:

Error Term


When the actual Y differs from the Y in the model during an empirical test, then the error term will not be equal to 0, which means there are other factors that influence Y.

Articles Of Interest

  1.

    Beta: Know The Risk

    Beta says something about price risk, but how much does it say about fundamental risk factors? Find out here.

  2. The Capital Asset Pricing Model: An Overview

    CAPM helps you determine what return you deserve for putting your money at risk.

  3. Style Matters In Financial Modeling

    If you're looking to get a job as an analyst, you'll need to know how to work it.

  4. Quants: The Rocket Scientists Of Wall Street

    Blend math, finance and computer skills to command a high - and well deserved - salary.

  5. 5 ETFs Flaws You Shouldn't Overlook

    Despite their popularity, exchange traded funds have some drawbacks that investors should know about.

  6. Using The Price-To-Book Ratio To Evaluate Companies

    The P/B ratio can be an easy way to determine a company's value, but it isn't magic!

  7. Liquidity Vs. Solvency

    Learn about the differences between these two words and how each one is used in the stock market.

  8. Calculating The Means

    Learn more about the different ways you can calculate your portfolio's average return.

  9. Should You Invest Your Entire Portfolio In Stocks?

    It is true that stocks outperform bonds and cash in the long run, but that statistic doesn't tell the whole story.

  10. The Uses And Limits Of Volatility

    Check out how the assumptions of theoretical risk models compare to actual market performance.
comments powered by Disqus
Marketplace
Hot Definitions

  1. Fool In The Shower

    The notion that changes or policies designed to alter the course of the economy should be done slowly, rather than all at once.

  2. Pattern Day Trader

    An SEC designation for traders who trade the same security four or more times per day (buys and sells) over a five-day period, and for whom same-day trades make up at least 6% of their activity for that period.

  3. Cost-Push Inflation

    A phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials.

  4. Happiness Economics

    The formal academic study of the relationship between individual satisfaction and economic issues, such as employment and wealth.

  5. Affluenza

    A social condition arising from the desire to be more wealthy, successful or to "keep up with the Joneses." Affluenza is symptomatic of a culture that holds up financial success as one of the highest achievements.

  6. Icarus Factor

    The term Icarus factor describes a situation where managers or executives initiate an overly ambitious project which then fails. Fueled by excitement for the project, the executives are unable to reign in their misguided enthusiasm before it is too late to avoid the failure.
Trading Center