Well, a lossless format like APE (included in MC9) or FLAC (not included, but supported as an external encoder) would give you the best quality - both of them will reproduce exactly the same data as is on the original CD. (hence, lossless)
However, these files are pretty big - they'll be about half the size of an uncompressed wave, but still much larger than an MP3, AAC or Ogg file. You'll be looking at over 300MB for a typical CD.
As for compressed file formats, there is a lot of discussion. The compressed formats all rely on a psychoacoustic model of what people actually hear, in order to drop the unneeded parts of the signal and hence improve compression. Unfortunately, these models generally reflect the capabilities of an "average" listener, so different people might prefer different compression formats, or parameters. Also, you need to make a tradeoff between size and quality.
I personally find that VBR (variable bit rate) LAME encoded MP3s using "--alt-preset standard" sound fine to me, and yield about 6:1 compression ratios (ie. a full 650MB audio CD compresses to 100MB). These are supported directly within MC9, or you can call an external encoder. Some people prefer "--alt-preset extreme", which makes files about 15% larger. LAME VBR files will sound considerably better than CBR 160kbps (or even 192kbps) MP3s under practically all conditions.
The consensus is that at high bit rates MP3 sounds as good as other compression schemes - however, at lower bit rates Ogg, MPC and AAC seem better, and they generally produce smaller files. However, they are not as widely supported as MP3, especially on portables.
So if you emphasize quality, lossless is the way to go. From there on in, it depends on what tradeoff you're willing to make between size and quality. Lots of people find LAME VBR MP3s a good compromise. They sound good, are not too big, and are playable just about everywhere.