Stocks with increases in idiosyncratic risk tend to earn low subsequent returns for a few months. However, high idiosyncratic risk stocks eventually earn persistently high returns. These results are consistent with positively priced idiosyncratic risk and temporary underreaction to idiosyncratic risk innovations. Because risk levels and innovations are correlated, the relation between historical idiosyncratic risk and returns may reflect both risk premiums and underreaction and yield misleading inference regarding the price of risk. The results reconcile previous work offering conflicting evidence on the price of idiosyncratic risk and help to discriminate among explanations for the idiosyncratic risk-return relation. Received November 24, 2014; accepted December 20, 2015 by Editor Jeffrey Pontiff.