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Virtualisation is the process of housing 2 or more computers within the same physical machine or "Host". An operating system which deals with the creation and maintenance of virtual machines is installed on the host and then virtual machines are created within this operating system. These machines also have their own operating system but are mostly oblivious to the fact they are running within a virtualized environment. When creating a new virtual machine one can completely customize its hardware by assigning a portion of the hosts RAM, hard disk space, network throughput and processing power.
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