Short answer: Yes.
Long answer: If your external hard drive is over USB, you'll have to make sure your BIOS is set to boot from a USB device. Most computers can do this. Reboot your computer and watch for a message prompting you to press a key to enter setup. It should be one of the F keys, but it varies by manufacturer. F8, F10, etc.
You should be able to find the boot order in the menu somewhere. The order should be as follows: 1) CD/DVD drive 2) USB device 3) Internal HDD.
To install a new operating system on your external hard drive, reboot the computer with a Windows installation disc in the disk drive. You can also use a USB flash drive for this--Google if you'd prefer to do that. Generally, the Windows DVD is easier.
Once you've got your second OS installed on the external drive, it should either boot automatically when you start the computer with it plugged in, or you'll get a menu labeled Windows Boot Manager (I think) that will let you choose which OS you'd like.