Hi Julia,
This question is a little tricky, as it requires one to think in PMBOK terms in order to find the best answer. I agree that in real projects, very few PMs would come up with colocation as the only solution, however it is the best answer out of the 4:
A) In the question it did not specify that the team is lacking technical knowledge causing inefficiencies
B&C) According to PMBOK, phone conferences/detailed reporting/team meeting does very little in improving the speed of a project
D) Colocation can reduce the chance of conflicts, miscommunication, and in some cases members have the same access to sophisticated office equipment, thus improving productivity. (PMBOK 6, pg 340)
Hope this helps