I just did this. It's easy. Just make 2 partitions on your external, one smaller one for the installer and a larger one for the actual install. Click the restore tab for the installer partition, drag the DMG over to source and the installer partition to destination. Click Restore. When that's done, go to the installer partition in the finder and load the installer. Choose your new larger partition for the install.
When it's done installing, press option on startup to choose what to boot.