(1) I am looking to form a Market Neutral Portfolio based off possibly 2 factors. Factor1 is the Primary factor, I rank all the stocks (say 1000 stocks) based off the Factor1 value, and pick top 100 and bottom 100 stocks to form a long and short portfolio. And look at it's return historically, it it performs well.
(2) A typical practice is to use MarketCap as the weight to assign for each stock. Alternatively, I would like to see how Factor2 adds value to the analysis, to use as the weight for each stock. Do I normalize Factor2 values across the crosssection of stocks, and multiply with that value to assign the weight for each stock, or do I assign a weight of square(Factor2) or 1/Factor2? How do I analyze that and make decisions?