Portfolio Selection Using Return Mean, Return Standard Deviation and Liquidity in Tehran Stock Exchange

Markowitz, in his Portfolio selection theory, stated that investors
select their portfolios according to two criteria of risk and return.
Accordingly, he presented his mathematical model. One of the
criticisms of this model is that while investors, practically, consider
different criteria in forming their portfolios, it only considers the
return mean and return standard deviation. Liquidity is one of the most
important criteria in forming portfolios. The present research aims at
merging this criterion with Markowitz’s suggested model in Iran’s
market using liquidity filtering, liquidity constraints and thus forming
a model by using of which investors form a portfolio whose return,
risk and liquidity is optimal. The research results show that liquidity in
high levels has an effect on investors decisions and their efficient
frontiers.