You cannot create a blog within a blog as there is only one page you can post to in any blog. But you can create the appearance that you have posted to more that one page.
Create a category and assign it to all relevant posts prior to publishing them. Create a custom menu. Include the dynamic category page in the custom menu.
Please read this first Post vs. Page http://en.support.wordpress.com/post-vs-page/
(1) There is only one page we can post to in any blog.
(2) The static pages http://en.support.wordpress.com/pages/ we bloggers create do not automatically update.
Only the dynamic pages like Archives, Categories and Tags created by the software when we publish a post will update automatically update with new posts.
By default the front page of the blog is the Page that displays all posts in your blog. You can create a static front page and have your published posts display on another page http://en.support.wordpress.com/pages/front-page/ but doing that does not change what follows.
Though there is only one dynamic page in a blog for posts (not pages) http://en.support.wordpress.com/post-vs-page/ and we cannot post to more than that one page, we can create the appearance that we have posted to more than one page.
This guide will walk you through how to create category pages for your blog, to display groupings of similar posts on pages other than your front page. http://en.support.wordpress.com/category-pages/
Create a custom menu
Add dynamic categories and sub-categories pages to it
Create order and sub-menus (dropdowns)
Here's a link to my post on this http://onecoolsitebloggingtips.com/2013/07/25/create-a-wordpress-website-step-by-step/
There are many common errors, misunderstandings and misconceptions when creating custom menus and there are some tweaks you can use to improve your custom menu as well.