The standard value-weighted market factor (VMF) is not a well-diversified portfolio. In addition to a dominant market factor (DMF), the VMF contains an “idiosyncratic financial factor” (IFF) related to its relative overweighting of large-cap stocks. We present evidence that the IFF carries no risk premium and is effectively unrelated to macroeconomic aggregates and returns in other financial markets. We develop and find empirical support for three testable predictions of a theoretical model with an IFF and a high share of investor wealth in nontraded assets. First, market betas estimated using the VMF are typically lower than their counterparts estimated with the DMF. Second, biases in exposure to priced market risk (i.e., the DMF) are correlated with size. Using the DMF as an alternative market proxy resolves the size anomaly and obviates the need to include size factors in workhorse multifactor models. Third, the IFF has a negative alpha with respect to the VMF, but has no alpha with respect to the DMF. Finally, the DMF implies a stronger intertemporal risk-return tradeoff than does the VMF, which is related to the IFF introducing unpriced risk into the VMF.