We designed a new copolymer, poly(ethylene glycol)-block-poly(ε-caprolactone)-graft-poly(acrylic acid) (PAA-PEC), which could be chemically and physically coated onto iron oxide (Fe3O4) nanoparticles for theranostic applications. The chemically PAA-PEC-coated Fe3O4 nanoparticles (PAA-PEC-IO) were prepared using the carboxylic groups of PAA-PEC to bind the Fe3O4 nanoparticles during a co-precipitation reaction. Because of the amphiphilic properties of PAA-PEC, the compound self-assembled into a core-shell structure. The hydrophobic oleic acid-coated Fe3O4 nanoparticles could then be physically encapsulated inside the hydrophobic core of PAA-PEC (PAA-PEC-OA-IO) using an emulsion technique. A similar amount of iron content was controlled in both the PAA-PEC-IO and PAA-PEC-OA-IO (-23%). The particle diameters, morphologies, superparamagnetism, drug loading efficiency, and transversal relaxivity (r2) were studied and compared between the two magnetic nanoparticles. All results displayed the chemically-synthesized PAA-PEC-IO nanoparticles had higher potential than did the physically-synthesized PAA-PEC-OA-IO as an MRI contrast agent and a drug delivery carrier. Rodamine123-linked PAA-PEC-IO (PAA-PEC-IO-Rh123) was used as a molecular probe. Flow cytometric diagrams indicated that cellular internalization of PAA-PEC-IO occurred primarily through clathrin-mediated endocytosis.