Should it be higher for smooth walking motion? Or lower for stability?
A lower CG will tend to be more stable, but a higher CG will, in my opinion, give a nicer looking walk (less waddle). One of the projects I've been working on is a very small muscle wire powered biped. I was originally thinking of making a smaller version of MiniMechadon with a pair of AAA batteries mounted horizontally. I have since decided to mount the AAA's vertically and make it a humanoid (about 3" tall) to improve the walking characteristics.
That being said, if you're designing Knewt to compete in RoboOne-type competitions it would probably be better to have a lower CG to gain better inherent stability at the sacrifice of walking "style" and efficiency.