The long-term colloidal stability of magnetic nanoparticles (MNPs) is an important goal when such MNPs are used for biomedical applications. Co_0.5Zn_0.5Fe₂O₄ (CZF) MNPs were functionalized with polyethylene glycol (PEG) and the effect of surface functionalization on the colloidal stability was investigated by dispersing them in double distilled water, phosphate buffer saline (PBS) and Dulbecco's modified Eagle's medium with bovine serum albumin (DMEM-BSA) for possible application in magnetic hyperthermia. The colloidal stability was studied by measuring the particle charge and hydrodynamic diameter as a function of pH and ionic strength using the dynamic light scattering (DLS) method and zeta potential measurement. DLS and zeta potential results indicated that PEG-CZF MNPs dispersed in DDW exhibited poor stability, whereas those dispersed in PBS and DMEM-BSA exhibited excellent stability. An induction heating experiment revealed that the hyperthermia temperature (42–43 °C) could be achieved by the PEG-coated sample at a magnetic field of 168–335 Oe and a fixed frequency of 265 kHz. Interestingly, a high specific absorption rate (SAR) of 193 W g^-1 was observed in the case of PEG coated MNPs in PBS medium, this is a very important parameter in hyperthermia applications and such a high SAR comes from the high contrition from the Brownian rotational relaxation because of the better dispersion of MNPs in PBS medium. PEG coated MNPs at concentrations below 1.8 mg mL^-1 exhibited good viability above 86% in mice fibroblast L929 cells. The results suggest that co-precipitation synthesized CZF MNPs coated with PEG can be used as potential heating agents for magnetic particle hyperthermia.