Not really a compelling rationale, but I would go with method 2 because that's what The Economist does:
![text snippet from The Economist with mixed case abbreviation](https://i.stack.imgur.com/57Y1J.png)
(The Economist, November 6th 2010)
In order to get small caps from a font through the standard commands such as \textsc
, the font you have loaded needs to have small caps. The font you've chosen, DejaVu Serif Condensed, doesn't. When you compile your MWE, you will as a result get a font warning from LaTeX that no small caps exist for this font, and that it will use the normal font instead:
LaTeX Font Warning: Font shape `T1/DejaVuSerifCondensed-TLF/m/sc' undefined
(Font) using `T1/DejaVuSerifCondensed-TLF/m/n' instead
There is therefore nothing you can do to get small caps from the font, other than faking them by tweaking the full caps glyphs. But unless you are tied to DejaVu Serif Condensed for some reason (and I don't see why you would be), what you should do if you want good-looking small caps is to switch to a font that has them. You can browse through the LaTeX font catalogue which will tell you if the font has small caps or not.
If you need to stick to DejaVu Serif, then you could switch to another font only when you need small caps. How to do that has been asked and answered before. I've just copied the code from there below.
\documentclass{memoir}
\usepackage{DejaVuSerifCondensed}
\usepackage[T1]{fontenc}
\usepackage{pdftexcmds}
\makeatletter
\let\scshape\relax % to avoid a warning
\DeclareRobustCommand\scshape{%
\not@math@alphabet\scshape\relax
\ifnum\pdf@strcmp{\f@family}{\familydefault}=\z@
\fontfamily{lmr}%
\fi
\fontshape\scdefault\selectfont}
\makeatother
\begin{document}
This text should be in DejaVuSerif\par
\textsc{While this should be in Latin Modern}
\end{document}
![enter image description here](https://i.stack.imgur.com/SW3Wq.png)
See egreg's answer for more details, and Alan Munn's answer for how to find the font family names. You need to decide for yourself which small caps font goes well with DejaVu Serif (I don't recommend Latin Modern as in my example). Browse the font catalogue.
Best Answer
The font shape commonly known as “small caps” is actually Capitals and small capitals, meaning that uppercase letters are like the standard capital letters in the normal shape, whereas lowercase letters are small capitals.
So you want
\textsc{am}
, if you want reduced size of the capital letters.