How does the time value of money relate to risk assessment in investments?

The time value of money illustrates the principle that money available today is worth more than the same amount in the future due to its potential earning capacity. This concept directly ties into risk assessment in investments by highlighting how the timing of cash flows affects their present value.

When evaluating investments, understanding how various time horizons can influence expected returns is crucial. For instance, a dollar earned today can be invested to generate returns, whereas a dollar received in the future lacks that immediate growth potential. Therefore, investment decisions often rely on calculating the present value of expected future cash flows to understand their worth in today's terms. This allows investors to assess the potential return relative to the risks associated with waiting for those cash flows.

While the other options might relate to aspects of investment analysis, they do not accurately capture how the time value of money is fundamental to understanding the relationship between time and investment risks. Volatility is more concerned with price fluctuations, not directly with the time value concept. Eliminating potential risks is unattainable in practice, and focusing solely on past performance disregards the future time aspect, which is essential for robust investment analysis.