This study considered the impacts of diesel–soybean biodiesel blends mixed with 3% cerium coated zinc oxide (Ce-ZnO) nanoparticles on the performance, emission, and combustion characteristics of a single cylinder diesel engine. The fuel blends were prepared using 25% soybean biodiesel in diesel (SBME25). Ce-ZnO nanoparticle additives were blended with SBME25 at 25, 50, and 75 ppm using the ultrasonication process with a surfactant (Span 80) at 2 vol.% to enhance the stability of the blend. A variable compression ratio engine operated at a 19.5:1 compression ratio (CR) using these blends resulted in an improvement in overall engine characteristics. With 50 ppm Ce-ZnO nanoparticle additive in SBME25 (SBME25Ce-ZnO50), the brake thermal efficiency (BTE) and heat release rate (HRR) increased by 20.66% and 18.1%, respectively; brake specific fuel consumption (BSFC) by 21.81%; and the CO, smoke, and hydrocarbon (HC) decreased by 30%, 18.7%, and 21.5%, respectively, compared to SBME25 fuel operation. However, the oxides of nitrogen slightly rose for all the nanoparticle added blends. As such, 50 ppm of Ce-ZnO nanoparticle in the blend is a potent choice for the enhancement of engine performance, combustion, and emission characteristics.