I'm wondering why I got this question wrong, as I thought the point of hold positions were to protect aircraft from each other. Any ideas?
You are correct that the general idea of a "runway hold position" sign is to keep aircraft from hitting each other, but that applies to all three answers. You need to tighten your focus a little.
The Aeronautical Information Manual paragraph 2–3–8 is a reference you can use for this question. You can see that a runway hold position sign (2–3–8b1) denotes a holding position short of a runway itself while a runway approach area holding position sign (2–3–8b2) protects the approach (or departure) path to a runway even though the taxiway does not intersect with the actual runway pavement. Your selected answer "C" refers to a runway approach area holding position sign.
That said, I would call the question misleading because both answers "A" and "B" might refer to a runway holding position sign. But if you carefully parse the wording, answer "A" refers to intersecting runways in general while "B" refers specifically to the point where a taxiway enters a runway; a runway holding position sign encountered on another runway does not denote intersecting runways in general but—just like on a taxiway—the point where a runway enters another runway. It's a very fine point, but if I give the test-writer the benefit of the doubt I can see the difference.
...I'll still call it a misleading question though. But it's the sort of question you have to expect from the FAA.