Plenty of simple tutorials on making a usb drive bootable and using the windows usb dvd download tool to copy over the windows installer, but they all require me to format the entire device. How can I use a volume created with "shrink drive" under Windows Volume Manager as a windows install medium?
If you mean "Howto to free disk space (aka. resize existing partitions) to create a new partition for Windows", you can try Partition Magic (commercial tool by Symantec) (french demo download link).
A free alternative to Partition Magic on Windows seems to be EaseUS Partition Master free.
Another alternative is GParted, but it is not available on Windows. GParted is a partition editing tool that allow to resize existing partitions. It is a free software (as in freedom and free beer). For computers that does not have GNU/Linux, GParted is available on Live CD.
As Ramhound said, installating Windows on a USB drive is a bad idea, since the drive letter will never be fixed. It may be possible to install Windows on a eSATA key.
A free alternative tool to create a Windows USB install disk is WinToFlash, it may have the feature you need.
When you install windows, you have the option to choose what partition to install it to, it will not automatically overwrite and existing OS.
So first create the partition of your liking by any means you find that works. Then, reboot with the install medium and look for the part of the install process that mentions partitions and installation location. Select your desired location and move forward through the process. Usually, if you select a partition that has an existing OS on it, it will throw a big warning, so even if you mess up, you should have at least on chance to undo your actions.
From my understanding, it will install a few files on the first partition of the primary drive, but the bulk of the OS will be installed on the partition selected.