From CFAI curriculum:
“That is, if there was no exchange rate risk, then it would be the case that σ2(RDC) = σ2(RFC). Using this as our base-case scenario, adding exchange rate risk exposure to the portfolio usually adds to domestic-currency return variance (the effect is indeterminate if exchange rate movements are negatively correlated with foreign asset returns)”
The comment in parenthesis got me… Surely a negative correlation between R(fc) and R(fx) will dampen the volatility of R(dc), no?