Alaba's free transfer to the Santiago Bernabeu was confirmed in May after bringing an end to his 13-year association with Bayern Munich.
The 29-year-old, who featured four times for Austria at Euro 2020, has built a reputation for his versatility with an ability to play centre-back, left-back or in midfield.
Ancelotti knows all about Alaba's adaptability, having previously worked together for one full season at Bayern, and is looking forward to getting the most out of the 10-time Bundesliga champion.
"Alaba is a complete player, with a lot of quality and tactically intelligent in defence," the coach told Real Madrid TV.
"I put him at centre-back in my last games at Bayern Munich, but sometimes he plays in midfield for Austria and can also play on the left.
"He is a complete player who is going to do very well this season."
Alaba will also bring experience to the Madrid squad, having racked up 448 appearances for Bayern and won 27 trophies during his time in Bavaria.
He is expected to plug the void left by long-serving centre-back Sergio Ramos, who last week completed a move to Paris Saint-Germain on a free transfer.
Marcelo has succeeded Ramos as captain and returned to pre-season training last week along with some other familiar faces.
Ancelotti, who is in his second spell as Madrid head coach, praised the dedication of some of the team's more senior pros.
"We have worked a lot," he said. "The players have done very well. There is a lot of quality in the youngsters and a great commitment from the veterans.
"I really liked the commitment of Dani Carvajal, Nacho, Marcelo, Lucas Hernandez and Isco.
"They are players who have won everything and still have the desire, enthusiasm and hunger to have a great season as we would all like to have."
Ancelotti was sacked by Madrid during his first stint six years ago, despite winning the Champions League, Copa del Rey, UEFA Super Cup and Club World Cup.
Los Blancos averaged 2.7 goals per game during Ancelotti's previous two-year reign, a number aided by the presence of the club's all-time leading scorer Cristiano Ronaldo.
In LaLiga, Ancelotti's side led the way in terms of goals, scoring 104 in 2013-14 and then 118 in the following campaign, eight more than a treble-winning Barcelona squad led by Luis Enrique.
His Madrid averaged 18.1 shots per game – the same number as Zinedine Zidane's side during the Frenchman's first stint – with a conversion rate of 14.9 per cent.
With Ronaldo long gone, Ancelotti may struggle to match the offensive numbers of his previous version of Madrid, but he is acutely aware of what is expected from his team.
"We have to take into account the history of this club," he said when asked to describe his preferred style of play.
"The team has to play well, showing the quality they have. Real Madrid's history is about energetic football, with intensity with the ball and without the ball, which is what today's football requires."