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Confusion on the Standard Deviation in Domestic Currency

vincenttvincentt LondonPosts: 749 Sr Portfolio Manager
edited February 2014 in CFA Level III
Equation 3 in the image below is actually the formula to calculate standard deviation for a portfolio with 2 assets.

Rdc = Asset return in domestic currency
Rfc = Asset return in foreign currency
Rfx = Foreign Exchange return
p = correlation


I understand that with a risk free foreign asset you would have 0 standard deviation (SD) hence the first (SD Rfc) and last item in the addition (2 * SD Rfc * SD Rfx * correlation) will be 0 which leave with just SD of Rfx.

What I don't understand is why do we have to multiply the total SD with (1 + Rfc) in Equation 4?


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