You can install a new version of the framework next to the existing one, therefore both are available. (This is the default value --- Actually, this is a little work to get rid of the old one). The latter will install all the files it needs.
Note that v1.1 uses one version of the CLR; 2.0, 3.0 and 3.5 used another, and 4.0 uses another. So, if you need to run an application that specifically requires CLR version 2.0, you also need to install it (but theoretically they should all be able to use CLR v4.0).
As for updating your code, it doesn't make sense that it goes through multiple update iterations - just update to the latest version.