Finance

Line of Best Fit

Line of Best Fit

A trendline or a Line of best fit is an educated guess as to where a linear equation will fall in a data set plotted on a scatter plot. It helps in understanding and observing trends and patterns in data and how closely they are related to each other. It is a straight line that gives us the best approximate of a given data set. It basically expresses the relationship in a scatter plot of different data points. It is the most important output of regression analysis. Typically, statisticians use the least square method to derive the line of best fit. It can be calculated as mentioned below.

Get complete FRM Online Course by experts Click Here

How it is calculated?

The following steps are performed to derive at the line of the best-fit equation:

Line of Best Fit

How it is used?

› It is a tool used for expressing how data points on scatter plots are related to each other.

› It helps in the prediction of indicators and price movements.

Get complete CFA Online Course by experts Click Here

Example and Interpretation:

Line of Best Fit     Line of Best FitLine of Best Fit

Line of Best Fit

CalculationSlope

 

Bottom Line:

A trendline helps us understand how a scatter plot can be used to draw inferences about the correlation between two variables. It is a graphical representation that helps investors in the analysis of stock prices and future trends. It is widely used by professionals in various fields ranging from science and public services to financial analysis.

Author: Urvi Surti

About the Author:

Urvi is a commerce graduate and has a keen interest in Finance. She has completed her Chartered Wealth Management (CWM) from the American Academy of Financial Management and is currently pursuing a career in Financial Risk Management (FRM).

Related Posts:

Correlation in Financial Market

What is Kurtosis?

Standard Error

What is Backtesting?

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *

5 × 3 =