We investigate the role of investor sentiment as a risk factor in stock returns. The average return differential is 1.48% (0.75%) per month between the decile portfolis with the highest positive (most negative) sentiment beta and that with zero sentiment beta. The sentiment factor, SMN, has statistically significant average returns ranging from 1.36% to 0.67% per month, and commands a positive and statistically significant risk premium. Consistent with the theory that sentiment creates a risk in addition to fundamental risk, the sentiment-augmented asset-pricing models always explain the size effect, and conditional models often capture the size, value and momentum effects
