Minecraft – How to make a flying squid

Yes it does, but you have to specify the type of mob it is, or it won't target entities. As per the wiki:

When used without the type argument, @r always targets a random player. The type argument can be used to target non-player entities [...]

Here is a example:

/tp @r[type=Squid,name=Random] ~ ~3 ~

This would teleport a random Squid with the name "Random" 3 blocks up. Hope this helps!

You can't make arrows fly straight with just commands. You seem good enough with commands, so Ill just give you the basic idea.
change any arrow you shoot with the entity of a fireball. You could potentially make it an arrow riding an invisible fireball, but Im not sure how well that would work. You can't easily tell an arrow to face what direction you shot it in, so the arrow would simply be flying forward on an invisible fireball facing downward. There is no way to make an arrow fly straight without using that method. It doesn't look good, and I would recommend trying some different idea altogether than making arrows fly straight. You could tell the arrow to face a certain direction by sensing your direction and facing in that direction. There are endless possible directions you could be facing, and to even get a rough approximation of the arrow facing the direction you want you would need hundreds, if not thousands of command blocks.