Financial terms starting with “K”

5 terms · plain-language definitions for lifelong students and investors · Full glossary

Kelly Criterion: The mathematically growth-optimal fraction of capital to risk on a sequence of independent bets given a known edge. For a simple binary bet with probability p of winning and a ratio b of win-to-loss outcome, full-Kelly is f = (p × b - q) / b where q = 1 - p. The criterion maximizes the long-run geometric growth rate IF the edge is known with certainty AND outcomes are independent AND the return distribution is well-behaved — none of which holds exactly for an equity investor. Full-Kelly is therefore a useful theoretical anchor rather than a practical sizing target; fractional Kelly is what most professionals actually use.
Key-Rate Duration: A decomposition of a bond's or portfolio's total effective duration into sensitivities at specific points on the yield curve (typically 2yr, 5yr, 10yr, 30yr). Lets bond managers see WHICH part of the curve a portfolio is exposed to. Two portfolios with identical effective duration can have very different key-rate-duration profiles -- and therefore very different P&L under non-parallel curve shifts.
Kill Criteria: Specific, written-in-advance findings that would END work on an investment idea. Examples: \"if Q3 segment growth is below 12%, this thesis is wrong\"; \"if the new product launch is delayed past March, the catalyst window closes.\" Kill criteria are load-bearing because they prevent the analyst from rationalizing contradicting evidence as the work progresses -- they must be written BEFORE diligence begins, when the analyst is still neutral, and applied mechanically when the evidence comes in.
Knightian Uncertainty: A distinction drawn by Frank Knight (1921) between RISK (probability distributions are known, as with coin flips or well-calibrated historical data) and UNCERTAINTY (probability distributions are unknown, as with novel asset classes, regime changes, or geopolitical events without historical analogue). Standard quantitative models -- VaR, mean-variance optimization, Black-Scholes -- assume risk in the Knightian sense; recognizing when you are in uncertainty rather than risk should push you toward broader diversification, extra cash buffers, and a humbler stance on portfolio sizing.
Know Your Client (KYC): The regulatory and operational requirement that financial professionals collect baseline client information -- identity (legal name, ID, SSN/TIN, address), investment objectives, risk tolerance, risk capacity, time horizon, liquidity needs, source of funds, tax situation, and other holdings -- BEFORE making any recommendation. Mandated by USA PATRIOT Act Customer Identification Program (CIP), FINRA Rule 2090 (Know Your Customer), and the suitability/best-interest standards under FINRA 2111 and SEC Reg BI. KYC data feeds the IPS, the AML monitoring file, and every later suitability analysis. Done well it is the highest-leverage hour of the relationship; done badly it produces panicked calls in the first drawdown.

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