As for which gives a better gain for the monk, that just depends on how much the attack recovery helps out. Ignoring the recovery part of arms then every point in unarmed is twice as effective as arms (meaning that excluding the recovery part unarmed would need to cost 2x as much as arms to make putting points past master worth it, but due to recovery I would rate it at 1.5 to 1.75)

Although something I did just notice is that I just tried putting points into arms to see if it double dipped (added damage based on staff since I have it at GM and off of unarmed) and I found it didn't change my damage at all. W/o the staff I did 90-92 and with it I did 98-104. By upping my arms to 8 from 7 those numbers stayed the same, and they didn't move when it went from 8 to 9. However when I put a point into unarmed the all of the numbers went up by 2. This leads me to believe that there is either a display bug where arms isn't showing for unarmed, or a different bug where unarmed doesn't get the arms bonus since it doesn't count unarmed as a weapon (which then bleeds over to GM staff since it is used with unarmed).

Personally I feel that the monk can rival the knight, but I don't know which would be straight up better. Also can the knight GM body building? If not that would be something else to think about as it would make the monk a better HP sponge and give the group more total HP if you ever use shared life in addition to being able to throw around weak heals to help bring people back up if they are just barely unconscience.