Provided you have enough spare RAM it would certainly be possible. My Windows 7 installation take about 50+GB so I would need a fair bit of spare RAM. And it would take a fair while to read that 50GB from the disk when I rebooted the computer.
Personally I would go with an SSD; it's much cheaper and allows you to use your RAM for more constructive purposes.
I have a particular installation that takes up a very small amount of space (<4GB), and I'm trying to create a disk that I could take with me and boot on any computer, generally. I tried installing it on a USB drive, but the inefficiency with that solution is astounding.