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IMO it's more of a tricky wording and manipulative question, but the answer is correct. In simple word:
1. is about OTP setting: which comes under "External Identities" > All identity providers, Select Email one-time passcode. Link: https://learn.microsoft.com/en-us/azure/active-directory/external-identities/external-collaboration-settings-configure#configure-settings-in-the-portal
2. Question is about self service sign in setting: which comes under External Identities > External collaboration settings---Under Enable guest self-service sign up via user flows, select Yes. Link: https://learn.microsoft.com/en-us/azure/active-directory/external-identities/external-collaboration-settings-configure#configure-settings-in-the-portal
Honestly with more than 27 years in the field, I don't get why some vendors put such memory-specific questions rather than testing concepts and engineers ability to find the required detail when from documentations