Path Portfolio Optimization: Defect, Lift, and the Price of Path Complexity

Abstract

This paper builds Path Portfolio Optimization: portfolio theory on a path-first framework in which the signature is the universal coordinate of the price path, and asks whether it survives estimation. A portfolio is a linear functional of the signature, so the control lives in a truncated tensor algebra, the covariance of signature coordinates is the non-group-like part of the expected signature --- a defect form --- and the whole mean--variance problem becomes a linear system in one tensor. Two structural results follow. The lift is the execution convention: the gap between the Marcus and forward lifts, contracted with portfolio weights, is Fernholz's excess growth rate exactly, so excess growth is the geometricity defect of the portfolio map. And the antisymmetric block at level two is lift-invariant pathwise, so directional signals are convention-free while variance signals and ruin are not. The empirical finding is a dimensional trade-off. With the expected signature known, quadratic path functionals raise the certainty equivalent elevenfold for a pair of assets and sixtyfold for a cross section of twenty; with it estimated, the unregularized policy is severely negative until the sample exceeds roughly six observations per parameter, and shrinkage flips from harmful in the pair to indispensable in the cross section. The entire gain sits in the symmetric block, which is convexity in the terminal increment rather than path-dependence; the path-dependent antisymmetric block earns nothing when the driver has no expected area. And the sample-size floor belongs to unstructured estimation rather than to path complexity: an estimator that fits only the generator of the driver and rebuilds the expected signature recovers almost all of the attainable value at barely one observation per parameter