Which of the following methods is used to determine acceptable risk levels for a portfolio?

Determining acceptable risk levels for a portfolio is a critical aspect of investment management, particularly in the context of aligning with an investor's risk tolerance and investment objectives. Risk factor limits are used to quantify the maximum exposure to various risk factors that a portfolio may encounter. This approach helps investors ensure that their portfolio is not overly concentrated in any single risk factor, thereby managing overall portfolio risk.

Risk factor limits can include considerations such as the sensitivity of the portfolio to interest rates, credit risk, equity market volatility, and other dimensions of risk. By establishing thresholds for these risk factors, portfolio managers can effectively monitor and control risk exposure, allowing for adjustments as market conditions change or as the investor's risk appetite evolves.

The other options do not primarily pertain to assessing the acceptable levels of risk for a portfolio. Market capitalization limits relate to the size of companies included in a fund but do not directly define risk levels. Expense ratios focus on the costs associated with managing the portfolio rather than risk assessment. Debt-to-equity ratios may provide insights into individual company's financial stability, yet they don’t directly address the broader risk profile for an entire portfolio.