make sure, the ASP.Net service ("Network Serivice" by default) has file system permission to create folders in DNN root folder - it needs to create a virtual folder (named as you specified the child portals name) with a redirecting index.aspx inside.

Well, regarding the Security Settings, you need to make them visible. In Windows Explorer, go to Tools->Folder Options->View.

Navigate down to "Use Simple File Sharing" (for Win XP) or "Use Sharing Wizard" (for Vista).

Uncheck it. Click OK.

Now right click Directory or File whose permissions you want to manage. Select Properties. Now Select the "Security" tab. Here you can configure the permissins for users or roles. Assign appropraite Read/Write permissions to the account ASP.NET runs under here. If you are on localhost, and just testing out, then you can give "Full Control" to "Everyone" so that you dont have to mess around with permissions. However, be wary of doing this on a prod. server.