Create a <ul> and fill it based on a passed array

First of all, don't create HTML elements by string concatenation. Use DOM manipulation. It's faster, cleaner, and less error-prone. This alone solves one of your problems. Then, just let it accept any array as an argument:

var options = [
        set0 = ['Option 1','Option 2'],
        set1 = ['First Option','Second Option','Third Option']
    ];

function makeUL(array) {
    // Create the list element:
    var list = document.createElement('ul');

    for (var i = 0; i < array.length; i++) {
        // Create the list item:
        var item = document.createElement('li');

        // Set its contents:
        item.appendChild(document.createTextNode(array[i]));

        // Add it to the list:
        list.appendChild(item);
    }

    // Finally, return the constructed list:
    return list;
}

// Add the contents of options[0] to #foo:
document.getElementById('foo').appendChild(makeUL(options[0]));

Here's a demo. You might also want to note that set0 and set1 are leaking into the global scope; if you meant to create a sort of associative array, you should use an object:

var options = {
    set0: ['Option 1', 'Option 2'],
    set1: ['First Option', 'Second Option', 'Third Option']
};

And access them like so:

makeUL(options.set0);

What are disadvantages of the following solution? Seems to be faster and shorter.

var options = {
    set0: ['Option 1','Option 2'],
    set1: ['First Option','Second Option','Third Option']
};

var list = "<li>" + options.set0.join("</li><li>") + "</li>";
document.getElementById("list").innerHTML = list;