Do you think I should tell a friend what her nickname really means, or should I let her ignorance be her bliss?
What did you think before you asked?
I think she needs to know the truth about her nickname.
It's good to be honest with your friends, especially when it comes to names that people are calling them. They will respect you more for being truthful and a true friend.
I know, but I also want to get revenge on her, so maybe I shouldn't tell her and just let her live with the bad nickname. She is a bad person.
In that case, it sounds like maybe this person isn't much of a friend to you.  It's probably best for you to be honest, and to let her know the truth, but I don't think you should do so maliciously.  Let her know what other people are saying, but also make it clear that they do so out of affection.