Final answer:
DCF does not minimize reinvestment risk but takes into account the rate of potential reinvestment through the discount rate. Diversification can manage risk but does not ensure economic success. Investment risk level should be adjusted over an investor's lifetime, reflecting changes in risk tolerance and financial objectives.
Step-by-step explanation:
The Discounted Cash Flow (DCF) model is a valuation method used to estimate the value of an investment based on its expected future cash flows. In terms of reinvestment risk, the DCF approach does not minimize reinvestment risk, but it does incorporate assumptions about the rate at which cash flows could be reinvested.
This is reflected in the discount rate used in calculations. Reinvestment risk is primarily mitigated through a diversified savings and investing portfolio, balancing the risks and rewards of different assets. When considering the question, 'Does a diversified savings and investing portfolio ensure economic success?',
It is important to understand that while diversification can help manage and reduce risk, it does not guarantee economic success. Throughout history, high-risk investment strategies have sometimes led to significant losses. An investor should consider their investment risk level throughout their life, likely taking more risk earlier in their career and becoming more conservative as they near retirement.
The selection of the discount rate is crucial, which reflects the opportunity cost of capital and includes components like potential capital gains and dividends. This rate can vary widely among investors due to different expectations of future economic conditions and company performance.