Diffuser technology placed around hydrokinetic rotors may improve the conversion of the fluid’s kinetic energy into shaft power. However, rotor blades are susceptible to the phenomenon of cavitation, which can impact the overall power efficiency. This paper presents the development of a new optimization model applied to hydrokinetic blades shrouded by a diffuser. The proposed geometry optimization takes into account the effect of cavitation inception. The main contribution of this work to the state of the art is the development of an optimization procedure that takes into account the effects of diffuser efficiency, ηd, and thrust, CTd. The authors are unaware of any other work available in the literature considering the effect of ηd and CTd on the cavitation of shrouded hydrokinetic blades. The model uses the Blade Element Momentum Theory to seek optimized blade geometry in order to minimize or even avoid the occurrence of cavitation. The minimum pressure coefficient is used as a criterion to avoid cavitation inception. Additionally, a Computational Fluid Dynamics investigation was carried out to validate the model based on the Reynolds-Averaged Navier–Stokes formulation, using the κ−ω�−� Shear-Stress Transport turbulence and Rayleigh–Plesset models, to estimate cavitation by means of water vapor production. The methodology was applied to the design of a 10 m diameter hydrokinetic rotor, rated at 250 kW of output power at a flow velocity of 2.5 m/s. An analysis of the proposed model with and without a diffuser was carried out to evaluate the changes in the optimized geometry in terms of chord and twist angle distribution. It was found that the flow around a diffuser-augmented hydrokinetic blade doubles the cavitation inception relative to the unshrouded case. Additionally, the proposed optimization model can completely remove the cavitation occurrence, making it a good alternative for the design of diffuser-augmented hydrokinetic blades free of cavitation.