Sum Of Squares

AAA

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.

INVESTOPEDIA EXPLAINS '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).

RELATED TERMS
  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. Autoregressive

    A stochastic process used in statistical calculations in which ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. What types of assets produce negative portfolio variance?

    Assets that have a negative correlation with each other produce negative portfolio variance. Variance is one measure of the ... Read Full Answer >>
  4. 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 >>
  5. 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 >>
  6. How can I measure portfolio variance?

    Portfolio variance measures the dispersion of returns of a portfolio. It is calculated using the standard deviation of each ... Read Full Answer >>
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. Economics

    Explaining the Liquidity Coverage Ratio

    The liquidity coverage ratio requires banks and other financial institutions to hold enough cash and liquid assets on hand to weather market stress.
  7. Fundamental Analysis

    Calculating Valuation

    Valuation is the process of determining what an asset is worth.
  8. Economics

    Will the Selloff in China Hurt the Global Economy?

    Though China is the world’s second largest economy, its volatility in the stock market is unlikely to have an impact on the global or Chinese economy.
  9. Fundamental Analysis

    Understanding Qualitative Analysis

    Qualitative analysis is a general term describing the non-mathematical scrutiny used by investors and managers to make investment and business decisions.
  10. Economics

    Signs The U.S. Recovery Is Solid

    Many market observers lately have been making some pretty pessimistic evaluations of the U.S. economy, declaring that it’s stagnating and soft.

You May Also Like

Hot Definitions
  1. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  2. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  3. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  4. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  5. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  6. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!