Step 1: Create an app registration
First the application must be created/registered.
Step 2: Add an application permission
Application permissions are used by apps that run without a signed-in user present.
Step 3: Grant permissions -
Incorrect Answers:
Delegated permission -
Delegated permissions are used by apps that have a signed-in user present.
Application Proxy:
Azure Active Directory's Application Proxy provides secure remote access to on-premises web applications.
Reference:
https://docs.microsoft.com/en-us/azure/active-directory/develop/v2-permissions-and-consent