The Risk-Reward Framework at Morgan Stanley Research
The case describes the Risk-Reward framework that Morgan Stanley analysts use as a systematic approach to communicate a broader range of fundamental insights about a company rather than the traditional single point estimates. The goal of the framework is to focus the analysts' work on critical uncertainties and model a limited number of scenarios relevant to key investment debates. By outlining a bear, base and a bull case, the analysts can present the risk surrounding the expected outcome over the forecast horizon. The case outlines the key elements of the methodology and the process Morgan Stanley undertook to implement the framework on a world-wide basis starting in 2007, and discusses the challenges and opportunities that managers of the research department face as the framework is increasingly identified with their firm.Learning Objective:To teach forecasting and valuation in any course on financial statement analysis, business analysis and valuation, financial accounting, or financial markets. The case provides a real world look at the business of research and the process of producing and presenting research by describing the research business the process of equity valuation at Morgan Stanley. The risk-reward framework focuses on identifying key drivers of value in a company and how to incorporate them into forecasting and valuation of a range of scenarios rather than only point estimates. Further the case introduces valuation tools and presentation methods used at Morgan Stanley to conduct equity research. The case can be a useful guide for student projects in any valuation or financial statement analysis class