Using Hyper-V, what are the pros/cons of using the "Physical Hard Disk" option when adding a drive to a VM as opposed to just creating a fixed-size VHD that is as large as the disk?
The intention is for this disk to be allocated to a single VM so there isn't any requirement to have anything else using it.
I use VMs because they are portable. When you attach a physical disk, you lose most of the portability. It is much easier to copy a VHD file to another host than it is to move the physical disk between them.
The thing you have to think about is portability versus speed. It is largely accepted that giving a VM a real raw disk to work with is the largest performance gain you can make. When a VM runs in a file, it has an operating system thinking it's writing to a file, which in turn is asking an external operating system to write to a disk.
Disk write performance is probably the largest problem a VM can have.
More information: Coding Horror: The Single Most Important VM Performance Tip
I doubt that you could measure any performance difference incurred by putting a VHD on that single disk. Try it and see. I suspect you'll want to preserve the flexibility that BLAKE mentioned.
Something else to consider: as soon as you attach a pass-through disk, you lose the ability to take snapshots of that VM. The only workaround is to detach the disk, take the snapshot, and reattach the snapshot. It must be a SCSI disk in order for this to work. You also will want to make sure the VM is not writing to the disk before detaching it.