Hi Keith,
In my opinion, your answer was right. You know, there are tests on internet that aren't exact. I hope you undesrtand what I mean.
In Spanish:
- diario = dairy
- periódico = newspaper
- revista = magazine
But, it's true, as Andrew said, sometimes in Spanish we use word "diario" to refer to newspaper, in the sense you could buy and read it "everyday" (daily).
So, by context, you should know if diario could mean newspaper or dairy. Is there a context in your test? I don't think so. So, your answer it is not really wrong.