Investments glossary

Coefficient of Determination

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An inexhaustible good nature is one of the most precious gifts of heaven, spreading itself like oil over the troubled sea of thought, and keeping the mind smooth and equable in the roughest weather.

— Washington Irving

The coefficient of determination is a statistical measurement that examines how differences in one variable can be explained by the difference in a second variable, when predicting the outcome of a given event. In other words, this coefficient, which is more commonly known as R-squared (or R2), assesses how strong the linear relationship is between two variables, and is heavily relied on by researchers when conducting trend analysis. To cite an example of its application, this coefficient may contemplate the following question: if a woman becomes pregnant on a certain day, what is the likelihood that she would deliver her baby on a particular date in the future? In this scenario, this metric aims to calculate the correlation between two related events: conception and birth.

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