Until recently, there seemed to be a slight advantage in Google in setting  your blog up as a subdomain of your website rather than as a subdirectory or subfolder.  Because Google considered subdomains as separate domains, a website could sometimes achieve undeserved multiple rankings in the Search Engine Results Pages. But there were also some disadvantages, so the argument could go either way.

Matt Cutts just revealed that Google has tweaked its algo to remove any boost in the SERPs a website might get by using a subdomain. The algorithm adjustment neutralizes any unearned advantage, while still allowing websites and their subdomains to all rank well when the ranking is deserved.

So now, just set your blog up in the way that makes the most sense to you, because it no longer matters in Google.