I've put together a complete tutorial on how to make a hooded cape. Use a deep red material, or something shimmery to jazz it up.
After you have the red riding hood, the rest of the outfit can be anything. Just don't over do the red. A nice short dress looks best.
Find a pair of red shoes or boots to match to the hood.
Don't forget the basket! With this costume, you can have a little basket that has goodies inside. See if you can get someone else to go as the Big Bad Wolf to make the party a little more interesting.