This study examines the impact of terrorist incidents on stock returns of Pakistan. Daily stock returns have been used, covering period from 2009 to 2016. The study uses trend analysis and event study methodology; a fifteen days event window has been created to examine the effects of terrorist incidents on PSX stock returns. The study finds that terrorist incidents have significant impact on sample Pakistani Capital Market’s returns (i.e. PSX-100 returns). This study also documents the reaction of stock returns on the occurrence of terrorist incidents and incorporates the behavior of stock returns according to the category of a terrorist incident i.e. religious, political, and incidents regarding security forces. The study additionally reveals that the results of terrorist incidents show significant negative response after the occurrence of a terrorist incident. Supervisor:- Mr. Muhammad Ali Kemal