Portfolio Optimization in Mean-Risk-Liquidity Framework

Traditional portfolio optimization models primarily focus on two key elements: risk and return. In this study, we extend this classical framework by introducing a third critical dimension—liquidity. We propose a novel model in mean–risk–liquidity framework that incorporate second-order entropy into the Markowitz portfolio theory. Our models assign flexible weights based on the investor’s preferences regarding return and entropy, highlighting the role of diversification as a potential enhancer of liquidity. Building on this approach, we derive analytical expressions that offer concrete solutions to the portfolio optimization problem. Computational results validating our models are presented and comments in the final.