The I/O capabilities in the BLE settings tab lets you select the capabilities of the device that is provided to the other pairing devices. This info is then used along with the other device's IO capabilities, to select an appropriate pairing and key generation scheme as described in BLUETOOTH SPECIFICATION Version 4.2 [Vol 3, Part H] 2.3.5 Pairing Algorithms.
Now, selecting "Display and Keyboard" lets you have any pairing and key generation scheme/algorithm in your device. However, as described in the BLE core specification, the scheme selected will also depend on the other device involved in the pairing.
Let me know if you have any further questions on this.
Meenakshi Sundaram R