I'm still quite a newbie in Linux. But yes, I have tried this and it works perfectly. If I remember correctly, something similar is already mentioned in "HD Based How To". See here http://www.knoppix.net/docs/index.php/HdBasedHowTo (look at 1.2).

I used this method on smaller hard disks (< 2GB in size) and also a 1GB flash drive. I must say that I love the flash drive KNOPPIX machine!

HTH.