Investigating the Effectiveness of Beta on Return on Equity

Although the pandemic's impact gradually faded after 2020, McDonald's has experienced a falling return on equity, along with a rising beta. The purpose of this paper is to take McDonald's as an example, investigate the relationship between return on equity and beta, and investigate how beta is affecting the return on equity. This paper has discovered a negative correlation between the two variables and has assigned three possible reasons for this relationship. The first is that, under the situation of a negative return on equity and high beta, companies may seek more risky strategies, which may reduce the return on equity and increase beta if the strategies eventually fall. Using more conservative tactics can be an effective suggestion. Secondly, the use of diversified strategies may also contribute to this negative relationship, as firms may choose to concentrate their operations in areas where they have the greatest competitive advantage rather than spreading their influence across multiple areas. A third possible reason could be investors' reluctance to further invest in a company experiencing rising beta, a sign of high associated risks. This reluctance could lead to an increase in the company's cost of capital, thereby reducing the return on equity, unless accompanied by a significant increase in profit. To mitigate the severity of this issue, it is recommended that firms lower their level of sentiment, thereby reducing the level of panic among investors.