Preliminary Version Information , Diversification , and Cost of Capital ∗ †

Information, Diversification, and Cost of Capital We study the pricing implications of information in a noisy rational expectations model with a factor structure for multi-asset payoffs. There are two classes of price taking investors in our model; informed investors who receive private signals on asset payoffs, and uninformed investors who draw imperfect inferences about those signals from prices. We solve the equilibrium explicitly. We show that only information about systematic factors matters in determining asset risk premiums when the number of the risky assets is large. Idiosyncratic risk as well as the asymmetric information risk associated with idiosyncratic factors is fully diversifiable.