Please note that DVDs are low resolution, I am not sure the exact one, but here is what Wikipedia says the possibilities are:
At 25 frames per second (commonly used in regions with 50 Hz image scanning frequency):
720 × 576 pixels (same resolution as D-1)
704 × 576 pixels
352 × 576 pixels (same as the China Video Disc standard)
352 x 288 pixels
At 29.97 frames per second (commonly used in regions with 60 Hz image scanning frequency):
720 × 480 pixels (same resolution as D-1)
704 × 480 pixels
352 × 480 pixels (same as the China Video Disc standard)
352 x 240 pixels
The following formats are allowed for MPEG-1 video:
352 × 288 pixels at 25 frame/s, progressive (Same as the VCD Standard)
352 × 240 pixels at 29.97 frame/s, progressive (Same as the VCD Standard)
So, to begin with, the DVD will not be playing at the correct aspect ratio and will be stretched/look bad if played at full screen.
Next, a DVD-Rip is not as good as a DVD, they (generally) use lossy codecs and the resolution may be altered.
I should also say, buy your DVDs, do not download them!
Lastly, there is nothing wrong with your machine, the fact that you can play 1080p videos from Youtube makes me think 100% that the only problem is your video source. If you get a blu-ray or similar, you can probably play it without problems.
To just confirm, try downloading Big Buck Bunny in HD, if you can play that at HD, you can confirm 100% that the problem is your source input file.