Unlike all previous versions of the operating system, Windows 8/7 fully supports the creation and mounting of virtual hard drive (VHD) files. Creating a virtual hard drive sets aside a certain amount of space on your hard disk which can then be used as if it were a real hard drive, allowing you to copy to and from it, and even to install a whole operating system (such a previous version of Windows or a Linux based OS such as Ubuntu) onto it.
Press the Windows + R key combination to bring up a Run box, type compmgmt.msc and hit Enter.
The Computer Management dialog opens, click Disk Management in the left pane of the window and wait until you see all currently installed disks in the right pane.
Right-click Disk Management and then select Create VHD.
Click Browse to choose the location where you want your VHD stored, and give it a descriptive name. Choose the size you want it to be, and select dynamic or a fixed. If you want the disk to expand in size as you add files to it, then pick Dynamically expanding. Check Fixed size if you want a specific size and for it to stay that way. Click OK.
You will see the virtual hard drive listed as unallocated space in Disk Management. Right click on the virtual hard drive and select Initialize Disk.
Press OK in the Initialize Disk box.
Now it is time to create a volume by right-clicking the unallocated space and select New Simple Volume.
The New Simple Volume Wizard starts up and just press Next until the wizard is complete.
Now the new virtual disk is ready to be used, just like any other disk. You can see the virtual hard drive on your computer.