Large Signal Libraries: Equal-Weight Limits and the Divergent Spectra of Signals and PnL

Abstract

An ensemble of roughly 3,000 signals over 20 assets was reported to have approximately 90% correlation with the leading component of the asset-space return structure. Does having about 158 signals per available linear dimension explain that alignment? The population answer depends on the research process's design distribution and its relation to returns: crowding alone imposes neither a nonzero mean nor agreement with a principal component. The population theory developed here distinguishes four objects: the equal-weight signal, signal principal components, equal-weight profit and loss (PnL), and PnL principal components. The return operator in the motivating observation is a separate object. Independent libraries converge to their design mean; exchangeable libraries can retain a random conditional mean. Cross-sectional signals over $d$ assets, once demeaned and normalized, lie on the unit sphere $S^{q-1}$ of a $q$-dimensional space, $q=d-1$. Under axial symmetry, their nonzero mean is signal-cloud PC1 exactly when its longitudinal second moment exceeds $1/q$, the isotropic energy share. Residual-and-gap bounds quantify approximate alignment. Combining design weights into signals contracts the tangent of their angle to PC1 to at most $\sqrt{λ_2/λ_1}$ times its value, where $λ_1>λ_2$ are the leading signal-kernel eigenvalues; the factor is sharp. A target-aligned frame separates transverse signal geometry, which PnL discards, from dispersion weighting and temporal centering, which also change the spectrum. A reproducible synthetic example illustrates the geometric threshold, and a proposed empirical program separates library growth from limited-history estimation. No market-data empirical results are presented.