according to Modern Portfolio Theory and the Capital Asset Pricing Model, an undiversified portfolio contains risk that is not being compensated; that the only rational way to invest is in a (weighted) little bit of everything; and that a little diversification is better than no diversification.

Which is same conceptually as "investing on average across the entire country". So, while I'm not encouraging real estate investing, what you are saying runs completely against the generally accepted conclusions of Finance Theory.

The country as a whole -- by definition -- does get the average return. If you get an above-average return on your land value then somebody else has to get a below-average return, otherwise the average would be higher.

As an individual investor you probably don't care about other people's returns, but an economic analysis has to look at the average case and not at what lucky/sophisticated investors get.

Of course. Averages can hide very dramatic trends.

However, the average rate of return on real estate is pretty consistent. That would argue that although areas appreciate at different rates, over a long enough time period, they returns are all pretty small.