Sum Of Squares


DEFINITION of 'Sum Of Squares'

A statistical technique used in regression analysis. The sum of squares is a mathematical approach to determining the dispersion of data points. In a regression analysis, the goal is to determine how well a data series can be fitted to a function which might help to explain how the data series was generated. The sum of squares is used as a mathematical way to find the function which best fits (varies least) from the data.

In order to determine the sum of squares the distance between each data point and the line of best fit is squared and then all of the squares are summed up. The line of best fit will minimize this value.

BREAKING DOWN 'Sum Of Squares'

There are two methods of regression analysis which use the sum of squares: the linear least squares method and the non-linear least squares method. Least squares refers to the fact that the regression function minimizes the sum of the squares of the variance from the actual data points. In this way, it is possible to draw a function which statistically provides the best fit for the data. A regression function can either be linear (a straight line) or non-linear (a curving line).

  1. Line Of Best Fit

    A straight line drawn through the center of a group of data points ...
  2. Least Squares Method

    A statistical technique to determine the line of best fit for ...
  3. Residual Sum Of Squares - RSS

    A statistical technique used to measure the amount of variance ...
  4. Stepwise Regression

    The step-by-step iterative construction of a regression model ...
  5. Hedonic Regression

    A method used to determine the value of a good or service by ...
  6. Regression

    A statistical measure that attempts to determine the strength ...
Related Articles
  1. Investing Basics

    Calculating Beta: Portfolio Math For The Average Investor

    Beta is a useful tool for calculating risk, but the formulas provided online aren't specific to you. Learn how to make your own.
  2. 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.
  3. Options & Futures

    Bettering Your Portfolio With Alpha And Beta

    Increase your returns by creating the right balance of both these risk measures.
  4. 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.
  5. Budgeting

    The P/E Ratio: A Good Market-Timing Indicator

    Check out the returns this newer technical analysis tool would've yielded over the period from 1920 to 2003.
  6. Fundamental Analysis

    Using Decision Trees In Finance

    A decision tree provides a comprehensive framework to review the alternative scenarios and consequences a decision may lead to.
  7. Economics

    Understanding Tragedy of the Commons

    The tragedy of the commons describes an economic problem in which individuals try to reap the greatest benefits from a given resource.
  8. Fundamental Analysis

    Return on Investment (ROI) Vs. Internal Rate of Return (IRR)

    Read about the similarities and differences between an investment's internal rate of return (IRR) and its return on investment (ROI).
  9. Economics

    Current Probability of Donald Trump as President

    Predict the current odds of a Donald Trump presidency, and understand the factors that have kept him on top and the looming challenges he faces.
  10. Investing Basics

    Understanding the Random Walk Theory

    The random walk theory states stock prices are independent of other factors, so their past movements cannot predict their future.
  1. Is Colombia an emerging market economy?

    Colombia meets the criteria of an emerging market economy. The South American country has a much lower gross domestic product, ... Read Full Answer >>
  2. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  3. What are some of the more common types of regressions investors can use?

    The most common types of regression an investor can use are linear regressions and multiple linear regressions. Regressions ... Read Full Answer >>
  4. What types of assets lower portfolio variance?

    Assets that have a negative correlation with each other reduce portfolio variance. Variance is one measure of the volatility ... Read Full Answer >>
  5. When is it better to use systematic over simple random sampling?

    Under simple random sampling, a sample of items is chosen randomly from a population, and each item has an equal probability ... Read Full Answer >>
  6. What are some common financial sampling methods?

    There are two areas in finance where sampling is very important: hypothesis testing and auditing. The type of sampling methods ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  2. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  3. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  4. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  5. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
  6. Discount Bond

    A bond that is issued for less than its par (or face) value, or a bond currently trading for less than its par value in the ...
Trading Center