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Risk and diversification of nonprofit revenue portfolios: Applying modern portfolio theory to nonprofit revenue management
Author(s) -
Qu Heng
Publication year - 2019
Publication title -
nonprofit management and leadership
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.844
H-Index - 54
eISSN - 1542-7854
pISSN - 1048-6682
DOI - 10.1002/nml.21385
Subject(s) - diversification (marketing strategy) , modern portfolio theory , revenue , portfolio , business , sample (material) , index (typography) , finance , actuarial science , herfindahl index , risk management , economics , marketing , chemistry , chromatography , world wide web , computer science
This study uses modern portfolio theory (MPT) to estimate the risk of nonprofit revenue portfolios and examines to what degree the revenue concentration measure based on Herfindahl–Hirschman Index is associated with the portfolio risk measure based on MPT. The findings suggest that nonprofits with greater revenue concentration have lower revenue portfolio risk in the whole sample analysis. However, it is plausible that this result is dominated by organizations reliant on commercial income, which comprise over half of the sample. In fact, when examined separately, the relationship varies by an organization's primary funding structure. While higher revenue concentration is positively associated with portfolio risk for organizations relying on donations or those without a consistent primary funding source, it appears to associate with a lower portfolio risk for commercial organizations and those relying on government grants. This study reflects on the concept of diversification derived from portfolio theory and calls attention to a more nuanced approach to nonprofit revenue strategy.