Yes, ARW is the Sony version of Raw file, so it is definitely not native to Windows, hence the behavior you described when you used Photos app. I use Canon and shoot raw format (which is CR3 for Canon), I have the same issue when using Photos app.
You can set it to RAW & JPEG. This means each photo you take, it will be saved as one copy on RAW format and one copy in JPEG. Looks like your camera doesn't offer you a JPEG format only? If so, that's probably what you want to go for. Otherwise you can definitely do the RAW and JPEG, it will just fill up the memory card a lot faster. When you transfer, you can only transfer the JPEG and delete the RAW ones, if you are not huge in editing.
As for Fine or Standard, that's up to you. You can read about them here: https://www.sony.com/electronics/support/articl... This is about compression. If you want better quality, you can choose Fine, but it will take up more space.