How to Create a Virtual Hard Drive in Windows

Create a Virtual Drive 
This process creates virtual disks in the .VHD format where the minimum size is 3MB

1. Right-click on My Computer and select to Manage
          or 
    start > run > type "compmgmt.msc" > enter

The Computer Management screen opens click on Disk Management then Action and Create VHD 
Note : free space must be available in physical HDD
2.  Go to action and create VHD

3. Browse to the directory you want the disk to reside, 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.
    

To begin using it you’ll need to Right-click and select Initialize Disk.

 

In the initialize disk box just keep MBR selected and hit OK.

Create a Volume

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 it’s just a matter of completing it.

Choose the amount of space you want to use for the volume.

Assign it a dive letter that is not currently being used.

Format the new volume as NTFS, FAT32, or FAT. Check if you want a quick format and file compression.

The wizard is complete, click on Finish.

If you have AutoPlay enabled it should pop up for you to open up your new virtual hard disk.

It will be listed with the other disks in Disk Management.

Of course you will also see it listen under My Computer.