The relation between idiosyncratic risk and expected return is an academic central issue. This paper investigates the relation among idiosyncratic volatility ( IVOL) ，investor preference and stock returns. A theoretical model is established to explore the effect of idiosyncratic volatility on investor preference. The result shows that，for stocks with unrealized capital losses，investors will prefer high idiosyncratic volatility stocks，so the IVOL-return relation is negative among stocks with unrealized capital losses. While for stocks with unrealized capital gains，investors will prefer low idiosyncratic volatility stocks; so the IVOL-return relation is positive among stocks with unrealized capital gains. Fama-French five-factor model is used to estimate the idiosyncratic volatility，and prospect theory value is used to measure investor preference. The empirical results from group sorting test and Fama-MacBeth regression based on Chinese stock market supports the conclusion of the theoretical model. Our work based on prospect theory not only contributes to the theoretical research of idiosyncratic volatility puzzle，but also provides theoretical support and realistic guidance for the risk management of investors and the sustainable development of the capital market.