What is a 'Residual Sum Of Squares - RSS'

A residual sum of squares (RSS) is a statistical technique used to measure the amount of variance in a data set that is not explained by a regression model. The residual sum of squares is a measure of the amount of error remaining between the regression function and the data set. A smaller residual sum of squares figure represents a regression function which explains a greater amount of the data.

BREAKING DOWN 'Residual Sum Of Squares - RSS'

It is not possible to draw conclusions about the correctness of the regression function solely using the residual sum of squares. Since a sufficiently complex regression function can be made to closely fit virtually any data set, further study is necessary to determine whether the regression function is, in fact, useful in explaining the variance of the dataset. Typically, however, a smaller residual sum of squares is ideal.

Financial markets have increasingly become more quantitatively driven, as such, in search of an edge, many investors are using advanced statistical techniques to aid in their decisions. Big data, machine learning, and artificial intelligence applications further necessitate the use of statistical properties to guide contemporary investment strategies.

The residual sum of squares in one of many statistical properties enjoying a renaissance.

  1. Sum Of Squares

    Sum of Squares is a statistical technique used in regression ...
  2. Residual Income

    The amount of income that an individual has after all personal ...
  3. Least Squares Method

    A statistical technique to determine the line of best fit for ...
  4. Regression

    A statistical measure that attempts to determine the strength ...
  5. Hedonic Regression

    Hedonic regression is a method used in economics to determine ...
  6. Regressive Tax

    A tax that takes a larger percentage from low-income people than ...
Related Articles
  1. Financial Advisor

    Active Risk vs. Residual Risk: Differences and Examples

    Active risk and residual risk are common risk measurements in portfolio management. This article discusses them, their calculations and their main differences.
  2. Trading

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  3. Tech

    How Square Cash Works and Makes Money

    Square Inc. has rapidly grown into one of the largest payment processing companies in the United States, and here's how it makes money.
  4. Investing

    Square Is Becoming a Bank

    The company, which sells hardware for payments and lends to small businesses, took the first step by filing an application.
  5. Tech

    Square Inc. to Report Q3 Earnings (SQ)

    The global fintech leader may be positioned to secure its fourth consecutive earnings beat since its public debut in November of last year.
  6. Tech


    Square helps small businesses accept credit cards, track sales and inventory and even obtain financing.
  7. Tech

    Fintech Leader Square Posts Q3 Earnings Beat (SQ)

    Jack Dorsey's payments and financial services platform celebrates one year on the public markets with an earnings beat, securing revenue growth of 32% YOY.
  8. Tech

    Square Moves to Attract 'Upmarket' Clients (SQ)

    In the fintech leader's latest earnings call, the company indicates a push to harness larger businesses in order to gain more stable and lucrative revenue.
  9. Trading

    The Linear Regression Of Time and Price

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

    Square Stock at Risk on ‘Bitcoin Mania’: BTIG

    Analysts expect Square Inc. to lose more than a quarter of its value in the next 12 months.
  1. What are some of the more common types of regressions investors can use?

    Learn about the most common types of regressions investors use to model asset prices including linear regressions and multiple ... Read Answer >>
  2. What is the difference between linear regression and multiple regression?

    Learn the difference between linear regression and multiple regression and how multiple regression encompasses not only linear ... Read Answer >>
  3. What is the difference between residual income and passive income?

    Learn how passive income helps pay the bills with little work involved. Determine how residual income affects your ability ... Read Answer >>
  4. How can I use a regression to see the correlation between prices and interest rates?

    Learn how to use linear regression to calculate the correlation between stock prices and interest rates by taking the square ... Read Answer >>
  5. What is the difference between terminal value and residual value?

    Read a brief overview of residual value and terminal value, two near-identical terms that refer to the future value of a ... Read Answer >>
  6. What is the best app to track my residual income?

    Learn about apps that help you manage and track your residual income whether you have complex portfolios with multiple investments ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  3. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  4. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  5. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  6. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
Trading Center