Hi lsatquestions!
The second reason you posed as to why (B) is incorrect is almost spot on! As a few others have mentioned, answer choice (B) is an Exaggerated Answer because it says "holds
all of the genetic material of some other organism." When we look to the stimulus itself, we do not have evidence that proves all of the genetic material of the engulfed organism remains after endosymbiosis. In fact, we have evidence to the contrary!
If we look closely at the beginning of the stimulus, we see that the definition of endosymbiosis is "the engulfing of one organism by another so that a
part of the former becomes a functioning part of the latter." The word part here is of particular importance because we don't know exactly which part remains! Sure, it seems like that part will likely include genetic material, but how much? Does it have to be all of it? Could it just be a single gene? We don't know! So, this is an Exaggerated Answer and we can eliminate it.
I hope this helps!
Kate