Realize that there is the OGC KML Standard and how the specification of that standard gets interpreted and implemented in the Google Earth software. In particular there are some grey areas not well-defined in the spec that Google Earth implements as it does. The rules governing KMZ files and embedded content is not well defined and are clearly implementation specific. Some of the details are defined in Google KML Reference documentation and some are not. Some inconsistencies and undocumented features of KML and Google Earth can be found in the KML Errata.
There are restrictions both for what media content (embedded inside KMZ file) can be displayed inline within a description balloon and as well as what content can be linked to and accessed.
Here are some restrictions for <iframe>
content listed in the KMZ Tutorial
The <src>
element within an <iframe>
element cannot point to a local
file on disk, nor can it point to a file inside a KMZ file; it must
point to a URL on the Internet that a browser can visit.
As an exception to this rule you can in fact have an HTML file within a KMZ file and include that as <src>
element within an <iframe>
in the feature description with a relative URL but not many other media types are supported.
If you enable the "Allow access to local files and personal data" option in Tools/Option/General menu panel then this relaxes some access rules and are able to access some links to content (e.g. HTML, PDF, etc.) as you would from a web browser but mostly local files external to the KMZ file.