This study investigates the impact of investor sentiment on the cross-section of stock returns in the Pakistani stock market. For this purpose the investor sentiment index is developed for 83 firms of KSE-100 index for the period 2004 to 2014. Six proxies are used to construct the investor sentiment index. These proxies are number of IPOs, first day returns on IPOs, turnover, equity share in new issues, closed-end fund discount and dividend premium. Each of these proxies are isolated from the various business cycle components to remove the likelihood of their association with the systematic risk. The results indicate that the investor sentiment index is a weak predictor of the stock returns even after incorporating the firms specific characteristics. Same results are obtained when Fama French size sorted and book to market sorted portfolios are included. The graphical analysis suggests that investors do take account of sentiments to some extent as but sentiment do not provide alternate explanation of variation in cross section of expected returns based on compensation of systematic risk. Supervisor:- Dr. Attiya Yasmin Javid