The correct option is
E he/it
The correct answer is Option A.
HE is used for male nouns. MR. WATSON is a man. Thus HE is the correct answer.
IT is used as a pronoun in place of a third person neutral noun. THE MYSTERY is such a noun.
Thus IT is the correct answer.
The remaining options are incorrect because:
Option B: SHE is used to refer to a woman. MYSTERY is a neutral word.
Option C: SHE is used to refer to a woman. MR WATSON is a male and MYSTERY is a neutral noun.
Option D: THEY is used to refer to third person plural noun. Mr. Watson is a man.
Option E: THEM is a third person plural noun used to refer o more than one person.
THE MYSTERY is a neutral noun and does not refer to any person.