So ehm, my two cents about the game and prejudice :
I assume prejudice is a social and possibly hardcoded behavioral mechanism to easily distinguish friends and foes. I assume prejudice to be bad in a safe society, but most DF worlds are usually clusterfugs of !!fun!! in which being able to distinguish between ingroup and outgroup would be a valuable skill for collective and personal survival.
• Prejudice as a mechanism
DF already simulates some sort of prejudice, with the use of values. People from different civilizations already have a harder time going with each other. Two humans from different civs won't get along as two humans of the same civ, because they have less in common, and this is furthered by ethic differences between races. Humans and elves won't get along, wars will spark, and should they meet they have a higher chance to argue and fight.
• Prejudice as a tool
I think DF does a good job of simulating what a medieval murder investigation would look like. Each time I have a vampire in my fort, I look for people with different eyes or skin color. This may be not very PC, but people from other ethnicities that would join your fort on their own may have less than kind intentions and are the first on my suspect list, and have to go to makeshift trials to prove they are clean. To me this really looks like vanilla human behavior.
• Not over generalizing prejudice
DF worlds are multicultural at this point. Dwarfs and humans know each other, civilizations interract with each others. Mercenaries from various civilizations will gladly work for foreign lords and become accepted in a community. When prejudice outlast its survival value and becomes a detriment (when you're under attack by hordes of goblins, you just don't care if the swordman next to you have taupe skin let's say), it's toned down in most societies.
Besides, foreigners that get integrated into societies for a long time have children who will take on the values of said societies, therefore reducing tensions with locals, leading to a progressive assimilation of foreign populations
• On a final note
Civilizations sometimes have a peculiar take on tolerence. Some civs are generally more accepting than other, according to their worldgen. Being accepted by locals will therefore depend not only on the said locals but also on their cultural values.
TL;DR : From what I can see, prejudice is already simulated (lightly) by the game. I see no point in either making it a bigger deal than it is, nor to try and remove it. I want to see dwarves and elves having a frienemy relation, even if it's based on fantasy prejudice. I also like the idea that some human factions simply don't get along all the time, but I also don't want that to become a focus of the game. To me, it's already well simulated to the point it's present, but not tasteless
Edit :
'Prejudice' against kobolds, demons, and goblins sounds realistic and rational...
Yes and no, it depends on the context. Let's see a couple of goblins have went to a human fort and asked the local lord to stay to, for instance, make music. While the game will generate tensions between them and locals at first, their children would take on the values of the human civ. You add three generations, and the now goblin population is assimilated. Everyone know them, and is cool with them, as they are now a part of the social landscape. It's not totally unseen in DF (I saw that in my world) and I really like it this way.
I mean, given that context why would you hate them? You grew up with them, have go to their wedding, you drink together after work, and your children play with theirs. Prejudice past a certain point just would not make a lot of sense.