Line Of Best Fit

Definition of 'Line Of Best Fit'


A straight line drawn through the center of a group of data points plotted on a scatter plot. Scatter plots depict the results of gathering data on two variables; the line of best fit shows whether these two variables appear to be correlated.

A more precise method for determining the line of best fit is a mathematical calculation called the least squares method. The line of best fit is used in regression analysis, and is a key input in statistical calculations such as the sum of squares. It can also be used as a tool for analyzing investment risk or trading activity.

Investopedia explains 'Line Of Best Fit'


The line of best fit is a common but simplistic tool for showing how two variables may be related. Examples of types of variables whose correlation (or lack thereof) could be shown with a scatter plot and line of best fit include the number of months someone has been unemployed and the size of their emergency fund, the number of years of education completed and annual salary or mortgage interest rates and the number of home sales.



comments powered by Disqus
Hot Definitions
  1. Federal Reserve Note

    The most accurate term used to describe the paper currency (dollar bills) circulated in the United States. These Federal Reserve Notes are printed by the U.S. Treasury at the instruction of the Federal Reserve member banks, who also act as the clearinghouse for local banks that need to increase or reduce their supply of cash on hand.
  2. Benchmark Bond

    A bond that provides a standard against which the performance of other bonds can be measured. Government bonds are almost always used as benchmark bonds. Also referred to as "benchmark issue" or "bellwether issue".
  3. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures.
  4. Oil Reserves

    An estimate of the amount of crude oil located in a particular economic region. Oil reserves must have the potential of being extracted under current technological constraints. For example, if oil pools are located at unattainable depths, they would not be considered part of the nation's reserves.
  5. Joint Venture - JV

    A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it.
  6. Aggregate Risk

    The exposure of a bank, financial institution, or any type of major investor to foreign exchange contracts - both spot and forward - from a single counterparty or client. Aggregate risk in forex may also be defined as the total exposure of an entity to changes or fluctuations in currency rates.
Trading Center