Answer: 2

When using dummy variables to represent categorical variables in regression analysis, the general rule is: **Number of dummy variables = Number of categories - 1** Given three categories (small-cap, mid-cap, and large-cap): - Number of categories = 3 - Number of dummy variables needed = 3 - 1 = 2 Therefore, 2 dummy variables would be required to distinguish among small-cap, mid-cap, and large-cap stocks in a multiple linear regression. One category (typically the first one) serves as the reference category, and the other two dummy variables capture the differences from this baseline.

Author: LeetQuiz Editorial Team