Least Squares Method

AAA

DEFINITION of 'Least Squares Method'

A statistical technique to determine the line of best fit for a model. The least squares method is specified by an equation with certain parameters to observed data. This method is extensively used in regression analysis and estimation.

INVESTOPEDIA EXPLAINS 'Least Squares Method'

In the most common application - linear or ordinary least squares - a straight line is sought to be fitted through a number of points to minimize the sum of the squares of the distances (hence the name "least squares") from the points to this line of best fit.

In contrast to a linear problem, a non-linear least squares problem has no closed solution and is generally solved by iteration. The earliest description of the least squares method was by Carl Freidrich Gauss in 1795.

RELATED TERMS
  1. Sum Of Squares

    A statistical technique used in regression analysis. The sum ...
  2. Standard Deviation

    1. A measure of the dispersion of a set of data from its mean. ...
  3. Linear Relationship

    A statistical term used to describe the relationship between ...
  4. Multiple Linear Regression - MLR

    A statistical technique that uses several explanatory variables ...
  5. Regression

    A statistical measure that attempts to determine the strength ...
  6. Endowment Effect

    The endowment effect describes a circumstance in which an individual ...
RELATED FAQS
  1. No results found.
Related Articles
  1. Investing Basics

    Regression Basics For Business Analysis

    This tool is easy to use and can provide valuable information on financial analysis and forecasting. Find out how.
  2. Active Trading

    The Linear Regression Of Time and Price

    This investment strategy can help investors be successful by identifying price trends while eliminating human bias.
  3. Investing

    How to Use Stratified Random Sampling

    Stratified random sampling is a technique best used with a sample population easily broken into distinct subgroups. Samples are then taken from each subgroup based on the ratio of the subgroup’s ...
  4. Economics

    How A Limited Government Affects A Country's Finances

    Countries with limited governments have fewer laws about what individuals and businesses can and can’t do. What's the net result?
  5. Fundamental Analysis

    Lognormal and Normal Distribution

    When and why do you use lognormal distribution or normal distribution for analyzing securities? Lognormal for stocks, normal for portfolio returns.
  6. Investing Basics

    How Does Goodwill Affect Financial Statements?

    Goodwill is a bit of a paradox--intangible, yet it is recorded as an asset on the purchasing company's balance sheet.
  7. Investing Basics

    Using Normal Distribution Formula To Optimize Your Portfolio

    Normal or bell curve distribution can be used in portfolio theory to help portfolio managers maximize return and minimize risk.
  8. Technical Indicators

    The Normal Distribution Table, Explained

    The normal distribution formula is based on two simple parameters - mean and standard deviation
  9. Economics

    Can Investors Trust Official Statistics?

    The official statistics in some countries need to be taken with a grain of salt. Find out why you should be skeptical.
  10. Investing Basics

    R-Squared

    Learn more about this statistical measurement used to represent movement between a security and its benchmark.

You May Also Like

Hot Definitions
  1. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  2. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  3. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  4. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
  5. Investment Grade

    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such ...
  6. Fringe Benefits

    A collection of various benefits provided by an employer, which are exempt from taxation as long as certain conditions are ...
Trading Center