Portfolio Theory and Nonprofit Financial Stability

Abstract

This article models and tests for the factors that influence financial predictability for a nonprofit organization. Financial portfolio theory is used to model a nonprofit organization's optimal combination of revenue streams in order to minimize financial risk. The optimal combination of funding from government and other sources depends on the variance and covariance between the sources of revenue. Data from nonprofit foster care organizations in New York State are used to show that nonprofit organizations that are more dependent on government funding as a source of revenue have more predictable revenues.