The chemical structure and the localized surface plasmon resonance (LSPR) of size-selected AgxFe1–x (x = 0.5, 0.8) nanoparticles (NPs), produced by laser vaporization, were investigated experimentally and theoretically. Monte Carlo simulations employing a many-body-embedded-atom model show that small isolated Ag–Fe NPs should preferentially adopt core@shell structures with an iron core that may be deformed or off-centered while retaining a silver shell around it. Experimentally, the optical response of silica-embedded NPs was measured with a new environmental spectrophotometer based on spatial modulation and is discussed in relation with the NP chemical structure independently studied by transmission electron microscopy (TEM). Measurements performed on as-prepared samples show that iron rapidly oxidizes when exposed to air to form a magnetite (Fe3O4) shell, surrounding a purely metallic crystalline silver core. In situ optical measurements carried out successively under oxidizing and reducing atmospheres indicate that iron oxidation and reduction are reversible processes that are directly mirrored in the LSPR changes, in good agreement with optical simulations. The TEM observations, the environmental plasmonic spectroscopy measurements, and the various simulations lead us to conclude that iron and silver initially adopt a segregated configuration with a silver-enriched surface and that, during oxidation, iron likely diffuses throughout the silver shell, leading to an Ag@Fe3O4 configuration, while an inverse process may occur during annealing under a reducing atmosphere. Finally, we show that Ag–Fe NPs, co-deposited with alumina on a substrate kept at 400 °C, offer an alternative to preserve the metallic character of iron.