Comparison of Portfolios Using Markowitz and Downside Risk Theories on the Czech Stock Market

The paper deals with the comparison of Markowitz and downside risk portfoliotheories and the practical application of both approaches on the Czech stock market. Twoinvestment portfolios of stocks of companies included in the PX index of the Prague StockExchange have been constructed and their results are comparison. Design/methodology/approach: For the purposes of this paper, the secondary research methodhas been chosen based on structured data collection in order to clarify the scientific knowledgeof the modern and post-modern portfolio theory issues. The research part of the paper dealswith eight stocks, which were included in the PX index in the period from 1/2013 to 8/2018.Empirical data are obtained from the official website of the Prague Stock Exchange. Findings: The added value of the paper can be seen in the empirical testing and comparison ofmodern and post-modern portfolio theory in a small capital market with low market liquidity,such as the Czech stock market, since not many of them have been performed yet. Research/practical implications: The comparison of both approaches suggests that riskmeasurement using standard deviation is considered inappropriate in modern portfolio theory.Furthermore, it is evident that the more the instrument departs from the normal distribution, thegreater the differences in the risk assessment will be. Shortcomings of the Markowitz approachare remedied by post-modern portfolio theory that measures risk through downside risk, whichadequately responds to the asymmetry in returns. Originality/value: According to research, it is possible to state that modern theory allocatesstocks to the portfolio stocks with a high return-to-risk ratio. Furthermore, lower ability ofmodern theory to diversify the portfolio has been demonstrated. The post-modern portfolioachieves lower risk rate and greater diversification and seems to be more suitable for creatinga portfolio even in a small and less effective market.