This error occurs when the database owner for the files setting in the database properties is unassigned (or blank).

To fix this:

• Right click on the database you need to create a diagram for.
• Choose Files from the left hand navigation menu of the dialog box.
• Enter sa in the owner field.
• Click OK

This gives the sa permission to create files on the server.

src: SQL SERVER – Fix Error – Cannot execute as the database principal because the principal “dbo” does not exist