**Core Concept**
Penile growth during the embryonic development is a crucial aspect of urogenital system formation. The development of the external genitalia is influenced by the balance of androgen hormones, particularly dihydrotestosterone (DHT), which is produced from testosterone by the enzyme 5-alpha-reductase. The Sexual Maturation Rating (SMR) system, also known as Tanner staging, is a widely used method to assess pubertal development.

**Why the Correct Answer is Right**
The correct answer is related to the SMR stage 2, during which pubic hair and penile growth become apparent. This stage is characterized by the appearance of fine, downy hair on the pubic area and an increase in penile length and testicular size. The growth of the penis is largely due to the multiplication of cells in the corpora cavernosa and spongiosum. The increase in androgen hormones, such as testosterone, triggers this growth.

**Why Each Wrong Option is Incorrect**
**Option A:** This option is incorrect as penile growth is not a characteristic of SMR stage 1, which is characterized by the absence of pubic hair and prepubertal genitalia.
**Option B:** This option is incorrect as penile growth is not a characteristic of SMR stage 3, which is characterized by the appearance of coarse, curly pubic hair.
**Option C:** This option is incorrect as penile growth is not a characteristic of SMR stage 4, which is characterized by the development of adult-type pubic hair.

**Clinical Pearl / High-Yield Fact**
It's essential to remember that the development of external genitalia is androgen-dependent, and abnormalities in androgen production or action can result in disorders of sex development, such as androgen insensitivity syndrome.

**Correct Answer: B. Penile growth occurs during SMR stage 2.**