Is it possible to restore OS X .dmg file to External Drive? I recently traded in my iMac with 1TB HDD for a MacBook Pro with a 256 GB flash drive.

I want to restore my previous hard drive but obviously it won't fit on the new hard drive.

Is it possible to restore the .dmg to the external hard drive where the .dmg file resides? If not, how do I restore these files?

I have some very important files on there so I don't want to go testing something and then accidentally wiping that backup.

I think the attached image will do what I want but I would like to make 100% sure.
No,You can NOT restore .dmg to the partition where the .dmg file resides.
However you can restore to another disk, or another partition in the same disk.