Can you guess this science riddle?

You're wrong, the correct answer is "it depends", and the problem with your explanation is that you aren't taking all the variables into account.
Imagine that the rock is infinitesimally small - a point particle - it will displace water while it is in the boat, but once it's thrown overboard it won't displace any water at all. The boat will be lighter, so it will rise in the water, and the water level will therefore go down. If you increase the size of the rock, while maintaining it's weight, then it will displace more water, so that water level will go up.
*Ergo, the answer to the question is "it depends".*