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The paper deals with the empirical verification of the effectiveness and usefulness of risk diversification using the main stock exchange indices in the Eurozone (euro area) countries. A recognized methodology for examining the scope and limitations of international diversification for institutional investors is used in the paper. The goal of the research is to determine the effects of portfolio optimization i.e. the benefits of applying modern portfolio theory for institutional investors. The additional goal is to determine the effects of investing in Bitcoin on portfolio optimization. The research was conducted using the method of modern portfolio theory on a sample of Eurozone and Bitcoin countries. The movement of the values of stock exchange indices during 2019 was observed. Markowitz’s theory was applied to the observed values so that the change in the value of each index in the model was treated as a change in the value of one security. After that, the movement of Bitcoin values was introduced into the same data. The obtained portfolios were tested with data from 2020. The research will offer an answer to the question: “What are the advantages and disadvantages of using Bitcoin in portfolio optimization?” The contribution of the paper is reflected in the presentation of the scope and limitations of modern portfolio theory for institutional investments. The conclusion is that the rational behavior of institutional investors requires consideration of portfolio optimization using the Markowitz model because it is possible to create portfolios that, on the basis of historical returns, give the desired returns with certain risks. However, the application results deviate significantly from the expected return. The results show that the use of Markowitz’s method of portfolio selection, with all limitations, is desirable, possible, and applicable, but that it has serious limitations in terms of neglecting transaction costs, exchange rate differences, and actual trading on the stock exchange. The research also provides certain recommendations. Further research can be directed towards testing and improving the model. |
