The high cost of producing magnesium alloys containing rare earth with Mg-RE master alloy severely restricts the wide application of rare earth in magnesium alloys. Consequently, we have adopted a novel, cost-effective approach to preparing magnesium alloys containing rare earth elements by calcium thermal reduction of RE₂O₃. This paper presents the successful preparation of neodymium-containing magnesium alloy by the method described, with the process parameters optimized by orthogonal test and single-factor experiment. The optimum process parameters are 780℃ melting point, 1/6 content ratio of Ca to Nd2O3, and 90min reaction time. The results of SN ratios and ANOVA showed that time had the greatest effect on Nd yield, the content ratio of Ca and Nd2O3 followed, and temperature had the least effect on Nd yield. The actual Nd yield of the optimal alloy is 32.67%, which is in the range of Taguchi's prediction of 23.36% to 33.83%. Based on orthogonal experiments, the relationship between the three factors and Nd yield was studied separately and in detail. The results show that the Nd yield exhibits a trend of initial increase and subsequent decline as a function of reaction time, content ratio of Ca to Nd2O3, and melting temperature. The Nd yield peaked at a reaction time of 90min, a content ratio of Ca to Nd2O3 of 1/6 and a melting temperature of 780 ℃. A physical phase analysis and microstructure observation of the alloys prepared with the optimal process parameters were conducted. The alloy is comprised primarily of three distinct phases: α-Mg, Mg2Ca, and Mg41Nd5. This proves that Mg-Nd alloy can be prepared successfully by this method, and provides a new idea for the preparation of magnesium alloys containing rare earth.