h.264 seems to be best for 1080P, while .mkv seems to be the norm for 720P. It's always better to try for a specific quality level, rather than try for file-size. If you go for a smaller file-size, you're going to have considerable loss as far as quality goes. Keep in mind, however, that the very best in quality could wind up a file that's in excess of 20gb.
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