Assertion: A financial market performs allocative function.

Reasoning: It allocates or directs funds available for investment into their most productive investment opportunity.

Both Assertion (A) and reasoning (R) are correct and R is the correct explanation of A.

The correct answer is Option 1: Both Assertion (A) and reasoning (R) are correct and R is the correct explanation of A.

Assertion: A financial market performs allocative function. The assertion is correct because a financial market performs a vital allocative function in an economy. It acts as an intermediary, channeling the savings of households and individuals toward the capital needs of industries and businesses. By facilitating the creation and exchange of financial assets, it ensures that limited national resources are not stagnant but are put to use.

Reasoning: It allocates or directs funds available for investment into their most productive investment opportunity. The reasoning is correct as it defines exactly how the allocative function works: by directing available investment funds into the most productive investment opportunities. When this function is performed well, it results in a higher rate of return for savers (households) and ensures that scarce resources flow toward firms with the highest potential for growth and economic productivity. This process effectively links those with surplus capital (savers) to those who need it for productive activities (borrowers/investors).

The reason directly explains the assertion. The assertion states that the market performs an "allocative function," and the reason explains that this function specifically consists of directing funds into productive opportunities. Therefore, R is the logical explanation for A.