Reinvestment risk refers to the possibility that the cash flows received from an investment, such as interest or dividend payments, may earn a lower return when reinvested in a new investment. It arises from the fact that investment opportunities and interest rates may change over time. If an investor is unable to reinvest the cash flows at the same rate of return or in a similarly attractive investment, they may experience a decline in overall investment performance. Reinvestment risk is particularly relevant for fixed-income investments, where the periodic interest payments need to be reinvested to maintain the desired level of return.
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