The correct answer is: A. Stories about imaginary beast and creatures.
The folklore contains the traditions, customs and expressions of culture shared by a particular group of people. The tales, fairy tales, fables, legends, etc. common to a culture and all the characters present in the collective imaginary of the people, are part of its folklore.
We discard option C because it is incompatible with the concept of folklore, and option B and D are either religious or mythological.
Generally speaking, yes, it is true that a person will understand the compressed language of a poem better if she brings her knowledge of areas such as history and mythology to that poem, since this will help her understand potential "hidden" themes.
