Homoskedastic

DEFINITION of 'Homoskedastic'

A statistics term indicating that the variance of the errors over the sample are similar. This type of error structure is most often assumed in statistics, but is not always the case when regression is done. If the variance of the errors around the line of best fit varies much, it will not show a pattern or tendency.

BREAKING DOWN 'Homoskedastic'

For example, in a homoskedastic sample, the variance of errors will not increase when the variables increase.

Suppose you took a sample population of people, some with very high incomes and others with very low incomes. For the variance to be considered homoskedastic, the magnitude of the errors for each term compared to the line of best fit would need to be about the same for each person, regardless of the magnitude of his or her income. In reality this isn't likely to be the case very often.

RELATED TERMS
  1. Heteroskedastic

    A measure in statistics that refers to the variance of errors ...
  2. Variance

    The spread between numbers in a data set, measuring Variance ...
  3. Non-Sampling Error

    A statistical error caused by human error to which a specific ...
  4. Mean-Variance Analysis

    The process of weighing risk against expected return. Mean variance ...
  5. Central Limit Theorem - CLT

    A statistical theory that states that given a sufficiently large ...
  6. Standard Error

    The standard deviation of the sampling distribution of a statistic. ...
Related Articles
  1. Investing

    Explaining Standard Error

    Standard error is a statistical term that measures the accuracy with which a sample represents a population.
  2. Markets

    Explaining Variance

    Variance is a measurement of the spread between numbers in a data set.
  3. ETFs & Mutual Funds

    3 Reasons Tracking Error Matters

    Discover three ways investors can use tracking error to measure performance for a mutual fund or ETF, whether indexed or actively managed.
  4. Managing Wealth

    Calculating Portfolio Variance

    Portfolio variance is a measure of a portfolio’s volatility, and is a function of two variables.
  5. Investing

    Using Historical Volatility To Gauge Future Risk

    Use these calculations to uncover the risk involved in your investments.
  6. Markets

    How Does Sampling Work?

    Sampling is a term used in statistics that describes methods of selecting a pre-defined representative number of data from a larger data population.
  7. Trading

    Understanding Statistics

    Statistics provide the means to analyze data and then summarize it into a numerical form.
  8. Investing

    Exploring The Exponentially Weighted Moving Average

    Learn how to calculate a metric that improves on simple variance.
  9. Markets

    What is Systematic Sampling?

    Systematic sampling is similar to random sampling, but it uses a pattern for the selection of the sample.
  10. Investing

    Calculating Tracking Error

    Tracking error is the difference between the return on a portfolio or fund, and the benchmark it is expected to mirror (or track).
RELATED FAQS
  1. Is variance good or bad for stock investors?

    Learn how high variance stocks are good for some investors and how diversified portfolios can reduce variance without compromising ... Read Answer >>
  2. What is a relative standard error?

    Find out how to distinguish between mean, standard deviation, standard error and relative standard error in statistical survey ... Read Answer >>
  3. What is price variance in cost accounting?

    Understand what price variance is in relation to cost accounting. Learn the most common way price variance arises and how ... Read Answer >>
  4. How much variance should an investor have in an indexed fund?

    Learn more about the significance of variance in index funds, its value as a measure of volatility and other common analytical ... Read Answer >>
  5. How is an unfavorable variance discovered?

    Learn how unfavorable variance is discovered through defining budget numbers, such as standard rates for labor and materials, ... Read Answer >>
  6. What is the difference between standard deviation and variance?

    Understand the difference between standard deviation and variance; learn how each is calculated and how these concepts are ... Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center