1)

Correct option is: C) Both A and B are correct.

Explanation:

A) Large amount of debts entail the corporate to pay the huge amount of its income to be paid as interest expense and make extra burden on company to pay the interest. The fund which may be used by the management for the benefits of investors, gets diverted as interest expense. Hence, a large debt obligation limits management's ability to use corporate resources in ways that do not benefit investors.

B) Higher debts may increase the higher interest payments and it also creates the risk of missing interest payment and other penalties on non-payment of debts, which may land the company into litigation or liquidation processes. Therefore, Managers will prefer less debt as it lowers the firm’s risk of missing interest payments and being forced into liquidation.

2)

 There are no restrictions on short-selling, or other regulations that would affect the
ability to transact.

The CAPM market portfolio short selling allowed or not. Short selling only holds for individual it is not allowed and market as a whole it is allowed.Here the assumption is market are frictionless so, option A is correct.

One of the CAPM assumption is  Markets are in equilibrium.That is investors are price taker not price makers so, the first option Assets are tradeable at any price and in any quantity and no individual can affect the price is not correct.

It clear that option B is only correct.