Ridge
What is a Ridge? Ridge regression is the method used for the analysis of multicollinearity in multiple regression data. It is most suitable when a data set contains a higher number of predictor variables than the number of observations. The second-best scenario is when multicollinearity is experienced in a set. Multicollinearity happens when predictor variables...
Simple Moving Average (SMA)
What is Simple Moving Average (SMA)? Simple Moving Average (SMA) refers to a stock’s average closing price over a specified period. The reason the average is called “moving” is that the stock price constantly changes, so the moving average changes accordingly. SMA is one of the core indicators in technical analysis and is usually the...
Independent Variable
What is an Independent Variable? An independent variable is an input, assumption, or driver that is changed in order to assess its impact on a dependent variable (the outcome). Think of the independent variable as the input and the dependent variable as the output. In financial modeling and analysis, an analyst typically performs sensitivity analysis...
Actuarial Science
What is Actuarial Science? Actuarial science deals with applying quantitative and statistical techniques to answer uncertainties pertaining to the future. It may relate to finance, insurance, or any other field where there is a possibility of loss or injury. Professionals skilled in this field are called actuaries. In other words, an actuary can be defined...
Beta Coefficient
What is the Beta Coefficient? The Beta coefficient is a measure of the sensitivity or correlation of a security or an investment portfolio to movements in the overall market. We can derive a statistical measure of risk by comparing the returns of an individual security/portfolio to the returns of the overall market and identifying the...
Variance Formula
How to Calculate Variance? The variance formula is used to calculate the difference between a forecast and the actual result. The variance can be expressed as a percentage or an integer (dollar value or the number of units). Variance analysis and the variance formula play an important role in corporate financial planning and analysis (FP&A)...
Negative Correlation
What is a Negative Correlation? A negative correlation is a relationship between two variables that move in opposite directions. In other words, when variable A increases, variable B decreases. A negative correlation is also known as an inverse correlation. Two variables can have varying strengths of negative correlation. The variable A could be strongly negatively...
Covariance
What is Covariance? In mathematics and statistics, covariance is a measure of the relationship between two random variables. The metric evaluates how much, or to what extent, the variables change together. In other words, it is essentially a measure of the variance between two variables. However, the metric does not assess the dependency between variables. Unlike...
Portfolio Variance
What is Portfolio Variance? Portfolio variance is a statistical value that assesses the degree of dispersion of the returns of a portfolio. It is an important concept in modern investment theory. Although the statistical measure by itself may not provide significant insights, we can calculate the standard deviation of the portfolio using portfolio variance. The...
Correlation
What is a Correlation? A correlation is a statistical measure of the relationship between two variables. The measure is best used in variables that demonstrate a linear relationship between each other. The fit of the data can be visually represented in a scatterplot. Using a scatterplot, we can generally assess the relationship between the variables...
