Q: the definition of Growth Stock is different in CFAi book? In CFAi book5, P150, “Growth Companies and Growth Stocks” part. It says, Growth Companies is a firm with management ability and opportunities to make investments that have rates of return greater than firm’s required rate of return; i.e. ROE > K in growth companies. K is firm’s WACC. Growth Stocks are not necessarily shares in growth companies. A Growth Stock is a stock with a higher rate of return than other stocks in market with similar risk. The stock achieves this superior return because the market undervalued it compared to other stocks. If stock is undervalued, its price should eventually increase to reflect its true fundamental value. During period of price increase, the stock’s realized return will exceed the expected return based on its risk, and it is considered a growth stock. The definition is from the viewpoint of stock price comparison with intrinsic value; no matter company’s potential earning grow or not. Above definition is same as the ones in Schweser Notes book4, P210~211. IN Schweser Notes book4, P211, Professor’s Note: above terminology is specific to Reilly and Brown. In rest of world, growth stock has different meaning. In CFAi book5, P152, “Value versus Growth Investing” part. The second definitions are introduced, Value Stocks are those stocks that undervalued for reasons other that earning growth potential. They usually have low PE or PBV ratios. Growth Stocks are generally specified as a stock of a company that is experiencing rapid growth of sales and earnings (e.g. Google and RIM). As a result of its performance, the stock has high PE or PBV ratios. i.e. the definition is from the viewpoint of company’s potential earning, regardless its stock price, maybe overvalued much( e.g. Google has brighter future than any other IT companies right now, meanwhile Google’s high stock price US$700+ is also craziest up to now.) In Schweser Notes book4, P211~212, the second definitions are also described same as above. However, shall we remember 2 different “Growth Stocks” in mind when sitting in CFA level 1 exam on Jun/07? In CFAi book5, P152, 2nd paragraph, ending part, it says, unfortunately, the 2nd specification doesn’t consider critical comparison between intrinsic value and stock market price. Therefore, 2nd specification will not be used in subsequent discussions of valuation. The major point is you must use all information to derive an estimate of intrinsic value, and compare the intrinsic value to stock market price. Based on comparison, you decide if you should acquire it—that is will be a growth stock that provides a rate of return greater than what is consistent with its risk. So in CFA level 1 exam, we should remember and use 1st definition of “Growth Stocks”.