A `bad bank` doesn`t refer to a bank that is performing poorly or has become insolvent. Instead, it refers to an entity that takes over the `bad loans` of commercial banks to clean up their balance sheets. This makes option 4 and 3 incorrect.

An asset reconstruction company (ARC), also known as a `bad bank`, is established to buy the bad loans or non-performing assets (NPAs) of other banks at market price and recover them, which aligns with option 1.

An asset management company (AMC), option 2, is a firm that invests pooled funds into securities matching its declared financial objectives. AMC helps its clients diversify or venture their assets in already present investments. This definition is not aligned with the concept of a `bad bank`.

So, the correct answer is `an asset reconstruction company` - option 1.