Why do you have this fixation on a BluRay file or are you having a problem with the terminology!
You don't need a "BluRay File".
1. The AVI files should play fine on your computer.
2. Most modern DVD/BluRay/Media players should play the AVI files fine from USB.
3. If you mean upscaling from DVD to BluRay resolution (Let's say simplistically from 720 x 400 to 1920 x 1080), you are wasting your time. Quality willl actually be worse. Leave the upscaling to your TV or PC.
As I said, there are better options than AVI but the container (AVI, MKV, MP4) depends on what the lowest common denominator that your target playback devices will support and then we get into the choice of "Video Codecs" (AVC, H264, XVid, DivX) and "Audio Codecs" (MP3, AAC, DTS, AC3).
You may need to do some research on the web on the meaning of these.
I personally use MKV.h264.audiocopy as my baseline container/codecs.
As I said, I tried to keep this simplistic and hope I haven't confused the issue.
Regards
The Whiz!!!