City are among the favourites to lift the trophy in Madrid in June but despite believing City have the strongest squad, Arteta said it was hard to look beyond Real after winning it in each of the last three seasons - even without Cristinao Ronaldo and Zinedine Zidane.
Guardiola praised Arteta for his "outstanding contribution" after last season's record-setting title win and said he hoped his compatriot would stay so they could "finish what we started together in the upcoming years".
"I will be on the touchline and I'll try to make the right decisions and for the rest, nothing will change".More news: 4 injured, shooter down in Wisconsin shooting
Real Madrid have something special in this competition.
"It's a very open Champions League, that was the case last season and will be this season". People think we are candidates to compete against other teams in Europe. "Our aim is to win the Champions League and we feel we are improving".
Arteta was close to replacing Arsene Wenger in the summer, only for Arsenal to have second thoughts because of his lack of managerial experience, turning instead to former Valencia, Sevilla and PSG coach Unai Emery.
"I am privileged to be where I am".More news: At UN, US accuses Russia of 'cheating' on North Korea sanctions
"We have a fantastic momentum and there is still a lot of room for this club to grow - so I am very pleased with where I am".
"It is a good challenge, a very nice challenge, but if I had to choose, I would choose Pep on the touchline, because he does that job better than anyone else", Arteta said.
City defender Aymeric Laporte said: "Normally the coach is on the bench, but we know what we need to do and we get plenty of guidance from Mikel who works with us every day".
City have been drawn in Group F, which also includes Germany's Hoffenheim and Ukrainian side Shakhtar Donetsk.More news: Brett Kavanaugh accuser Christine Blasey Ford moves, hires security