Why is this the answer?

The answer is mind because the riddle is asking about a place where things that are not real can still feel very real to you. The mind is the special space inside your head where all your thoughts, your imagination, and your dreams live. It is like the amazing, secret theater where you are the only audience member and the only director. Let us look closely at the first part of the riddle: "Something wholly unreal, yet seems real to I." Think about when you have a super fun dream at night. In the dream, you might be flying like a superhero or talking to a silly monster. When you are having the dream, it feels totally real, right? Your heart might even race. But once you wake up, you know it was just a dream that you can not touch or show to a friend. It was "wholly unreal" because it was not truly happening in the world, but it felt completely "real" while it was happening. That is your mind working its magic. Your mind creates these detailed stories and pictures inside your head that are not actually out in the world with you. Or, imagine you are building a magnificent castle with secret tunnels and a friendly dragon in your head. No one else can see that castle or the dragon, but you can see every tower and flag clearly in your imagination. That castle is not a real thing you can touch or walk inside, so it is unreal, but your mind makes it seem very real to you. This is why the riddle says it "seems real." Your feelings work this way too. If you feel very happy or a little bit scared, that emotion is not a physical object you can hold, but it is a very real experience happening inside you. The second part of the riddle asks, "Think my friend, tell me where does it lie?" This is the part that points right to the correct answer. Where do your dreams, your imaginary castles, your clever ideas, and your true feelings live? They all live inside your mind. The mind is like the control center in your brain where you think, learn, feel, and imagine. It is a place that holds all the fantastic things you can think of, even the things that are not physical objects. It is the special container for all the things that are "unreal" to others but so real to you. This powerful and wonderful part of every person makes us all unique and allows us to have great adventures without even leaving our chair. The mind is a place of endless possibility and imagination, a space where the unreal can feel perfectly real.