This sentence tests two spelling traps (prostate vs prostrate) and two near-synonym pairs (ambivalence vs ambiguity, and immoral vs amoral) at the same time.
Putting it together: "A candidate ... faced a tinge of intellectual ambivalence when asked to spell the prostate gland. The fact that he carried notes ... would definitely be termed as immoral by faculty, but may be termed as amoral by more generous sections of students." Every word does its intended job.
Let's summarize:
So the completed sentence needs ambivalence, prostate, immoral, amoral, which is option 4 (originally D).